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Page 1 1 Presidential Emergency Board
2 No. 243
3 Between
4 National Railway Labor
5 Conference
6 Representing:
7 Union Pacific Railroad Company BNSF Railway Company 8 CSX Transportation, Inc. Norfolk Southern Railway Company 9 The Kansas City Southern Railway Company Alton & Southern Railway Company 10 The Belt Railway Company of Chicago Brownsville and Matamoros Bridge Company 11 Central California Traction Company Consolidated Rail Corporation 12 Gary Railway Company Indiana Harbor Belt Railroad Company 13 Kansas City Terminal Railway Company Longview Switching Company 14 Los Angeles Junction Railway Company Manufacturers Railway Company 15 New Orleans Public Belt Railroad Norfolk & Portsmouth Belt Line Railroad Corporation 16 Northeast Illinois Regional Commuter Railroad Corporation Oakland Terminal Railway 17 Port Terminal Railroad Association Portland Terminal Railroad Association 18 Soo Line Railroad Company (Canadian Pacific) South Carolina Public Railways 19 Terminal Railroad Association St. Louis Texas City Terminal Railway Company 20 Union Pacific Fruit Express Western Fruit Express Company 21 Wichita Terminal Association Winston-Salem Southbound Railway Company 22 And their employees represented by:
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Page 2 1 Rail Labor Bargaining Coalition consisting of: 2 Brotherhood of Railroad Signalman 3 Brotherhood of Locomotive Engineers and Trainmen Brotherhood of Maintenance of Way Employees 4 International Brotherhood of Boilermakers, Blacksmiths, Iron Ship Builders, Forgers and Helpers 5 Sheet Metal Workers' International Association National Conference of Firemen & Oilers 6 And a coalition of Rail Unions, consisting of: 7 Transportation-Communications International Union 8 American Train Dispatchers Association International Association of Machinists and Aerospace Workers 9 International Brotherhood of Electrical Workers Transport Workers Union of America 10 On behalf of the Coalition of Rail Unions: 11 Carmen R. Parcelli, Esq. 12 Elizabeth Romaj, Esq. Guerrieri, Clayman, Bartos & Parcelli, PC 13 1625 Massachusetts Ave. NW Suite 700 14 Washington, D.C. 20036-2343 202-624-7400 15 On behalf of the Rail Labor Bargaining Coalition: 16 Roland P. Wilder, Jr. 17 Stephen J. Feinberg, Esq. Baptiste & Wilder, P.C. 18 1150 Connecticut Ave., NW Suite 315 19 Washington, DC 20036 202-223-0723 20 On behalf of the Rail Carriers: 21 Donald J. Munro, Esq. 22 M. Carter DeLorme, Esq. Brian Easley
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Page 3 1 Jones day 51 Louisiana Ave., NW 2 Washington, D.C. 20001-2113 202-879-3939 3 CHAIRMAN JAFFE: Okay. On the record, please. Good morning, everyone. This is a 4 hearing before Presidential Emergency Board 243,
5 which was created effective Friday, October 7th,
6 2011, by executive order issued by President
7 Barack Obama. My name is Ira Jaffe, and I serve as
8 Chair of the PEB. I'd like to now introduce the
9 other members of the board. Seated to my far right
10 is Joshua Javits; to his left is Roberta Golick.
11 Seated to my far left is Arnold Zack, and to his
12 right is Gill Vernon. Seated at the table to my
13 left are Norman Graber and Susanna Parker, special
14 counsel to the Board. Before I ask any counsel to
15 introduce themselves for the record, a few
16 preliminary items should be noted. First, these
17 hearings are not public. Attendance is limited to
18 those who are invited by the parties. Accordingly,
19 I need to ask any persons who are not invited to
20 attend, including any members of the public and
21 any members of the press, to please stand and
22 leave at this time. Okay, good. Second, the only
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Page 4 1 authorized recording of the proceedings are those
2 being made by the court reporter, and so we need
3 to ask you to refrain from using any recording
4 devices of any type. Third, all cellphones, PDAs,
5 or similar devices should be made silent or turned
6 off. We also ask that attendees please refrain
7 from texting or e-mailing while in the hearing
8 room when we're in session. By prior arrangement,
9 the carriers will proceed first with the
10 presentation of their direct case. Counsel, would
11 you please introduce yourselves and indicate who
12 you represent in these proceedings, for the
13 record. DONALD MUNRO, ESQ.: Good morning. My name
14 is Donald Munro. I am lead counsel for the
15 National Railway Labor Conference, including all
16 of the carriers that are participating in this
17 proceeding. With me are my partners, Carter
18 DeLorme and Brian Easley.
19 CHAIRMAN JAFFE: Good morning. CARMEN PARCELLI,
20 ESQ.: Yes. My name is Carmen Parcelli. I'm with
21 the law firm Guerrieri, Clayman, Bartos &
22 Parcelli. I represent the Coalition of Rail
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Page 5 1 Unions. And with me at the end, or right here, is
2 my partner, Elizabeth Roma. ROLAND WILDER, JR.,
3 ESQ.: Roland P. Wilder, Jr., Baptiste & Wilder,
4 Washington, D.C. Our firm represents the Rail
5 Labor Bargaining Coalition, and with me is my
6 colleague, Stephen Feinberg, with our firm.
7 CHAIRMAN JAFFE: Okay. Welcome. Mr. Munro, are you
8 ready to make your opening? DONALD MUNRO, ESQ.:
9 Chairman Jaffe, members of the board, my purpose
10 this morning is to introduce the carriers' case.
11 I'd like to do so by outlining the basic themes of
12 our presentation. Others, especially Tim Gradia,
13 the Chairman of the National Railway Labor
14 Conference, will explain the carriers' proposal in
15 some detail. My intent is to sketch the broad
16 contours of our case, not fill in all of the
17 details. Because while this is in many ways a case
18 about data and numbers and details, the essence of
19 the case can be summarized in one word: Fairness.
20 This is a case about fairness, to the employees
21 and to the carriers, but it is also about fairness
22 to those who are not in this room: The employees
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Page 6 1 who are represented by the United Transportation
2 Union, to our customers, and to the American
3 public, who rely on this industry. Our ultimate
4 message is simple: You should recommend adoption
5 of the carriers' proposal based on the UTU
6 agreement, not just because it is a pattern, or
7 because it is generous, or because it advances
8 current healthcare policy. You should recommend it
9 because it is fair. Everything else that we will
10 present to you, the themes that reoccur and are
11 woven throughout our presentation, support that
12 core idea. And there are five basic underlying
13 subthemes or ideas that you will hear repeated in
14 the testimony of virtually all of our witnesses.
15 More to help me remember them than anything else,
16 I refer to them as the five P's. They are pattern,
17 preferred position, peer progression,
18 profitability, and productivity. The first three
19 of these are core reasons to adopt the carriers'
20 proposal; the last two are rebuttals to the
21 central themes that the unions have presented, and
22 I would like to briefly highlight each one. And
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Page 7 1 when I say "briefly," I do mean that I am going to
2 move fairly promptly through the highlights of our
3 case, including some of the key slides that you'll
4 be seeing later in our case-in-chief. So please
5 don't be concerned if you miss or don't have an
6 opportunity to absorb all of the details; this is
7 coming attractions, not the feature presentation.
8 The first P is pattern. There's no real debate
9 about the pattern principle, what it means, how
10 important it is in railroad bargaining. The basic
11 proposition is that there is a presumption that a
12 settlement with a major union should establish a
13 benchmark for other settlements. It is a
14 rebuttable presumption, to be sure, but there must
15 be a compelling justification to depart from a
16 pattern once it is set. This has been referenced
17 repeatedly over the years, most recently by
18 Presidential Emergency Board 242. And as 242 said,
19 a pattern provides an objective indicator of what
20 should result from arm's length bargaining, which
21 is ultimately the purpose of a Presidential
22 Emergency Board. And as 242 explained, patterns
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Page 8 1 serve several other critical purposes. It helps
2 provide stability in bargaining. It provides
3 benchmarks. It helps avoid disruptive competition;
4 leapfrogging, piggybacking. And it helps maintain
5 craft parity. Similar thoughts about the pattern
6 principle have been repeated by other boards over
7 the years, as I'm sure you're all aware. PEB 220
8 noted that pattern helps avoid competition among
9 union groups. Board 186 made reference to the
10 avoidance of piggybacking and leapfrogging. Board
11 194 made reference to the need for stability in
12 the industry. And Board 228 noted that it helps
13 encourage an organization to lead the way in
14 bargaining. Let me be clear about this. A pattern
15 is not a totem. They are not just invoking it and
16 saying you must accept it. The ultimate point of
17 pattern is that it is evidence of what is fair.
18 Now, to be sure, the unions have provided in their
19 materials quotes from a number of boards, mostly
20 from before deregulation, to support the idea that
21 pattern is, at best, a minor consideration. But if
22 you actually read the reports they cite, the
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Page 9 1 citations do not help them. These are all
2 references to the PEBs that are in their exhibits.
3 PEB 185, applied the pattern; PEB181, the pattern
4 should be followed; PEB 187, applied the pattern
5 shown by the carriers; PEB 174 said, quote, the
6 fact that other unions have accepted a particular
7 settlement is a fact of which the board must take
8 cognizance, and the offer is not presumptively or
9 grossly unfair or inadequate. The PB 186, after
10 the quote about slavish appearance, and which the
11 unions rely, the board goes on to say that what
12 matters is not the precise formula, but the
13 maintenance of the principle; that the members of
14 an organization shall not be treated more
15 advantageously than members of other organizations
16 who have established the pattern. Again, these are
17 their citations. And even 228 found an emerging
18 pattern and noted that it was influential and
19 rejected union demands that substantially exceeded
20 the carriers' proposal. So let me be clear. We are
21 not saying that as soon as the carriers say the
22 word "pattern" this case is over. You need to
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Page 10 1 conclude whether there is or is not a pattern. But
2 if you were to conclude that there is, that is
3 more than just significant. We will show you that
4 there is indeed a pattern to be applied here. The
5 UTU is the largest rail union; it represents
6 almost a third of the industry, almost as many as
7 the entire TCU coalition combined, and it has a
8 great deal of bargaining power. The deal on which
9 we relied was reached through tough arm's length
10 good-faith negotiations, as Mr. Gradia will
11 explain to you in detail. We did not get all we
12 wanted, and neither did the UTU. And it has been
13 ratified by a solid majority of all of the crafts
14 that the UTU represents. There are none of the
15 oddities or exceptions that have led to questions
16 in the past. This agreement was not imposed by
17 legislation or binding arbitration. There is no
18 failed ratification vote. We're not talking about
19 a small union with little bargaining power, and
20 this is not an obviously substandard deal. Perhaps
21 the most common objection to pattern which the
22 railroads heard in 1996 and which has been
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Page 11 1 repeated here is that if the carriers' offer does
2 not reflect all the elements of value of the
3 pattern, then the offer is not supported by the
4 pure pattern principle, and we will show you that
5 that is not applicable here. Each element of value
6 in the pattern is fairly reflected in the
7 carriers' offer, including entry rates,
8 certification pay, as well as general wage
9 increases. To refer to the recent decision of the
10 Massachusetts Bay Commuter Rail Panel that the
11 unions have quoted, the carriers have deliberately
12 monetized all of the economic gains that have been
13 extended to the first group to settle. So this is
14 a straight-up quintessential run-of-the-mill
15 pattern application, supported by all the
16 traditional policy rationales that I've outlined.
17 The pattern has been accepted by a third of the
18 industry and one of three major groups in
19 bargaining in this round. It encourages parity,
20 allowing wages and healthcare benefit levels to
21 remain stable among railroad employee groups. It
22 encourages early settlement by protecting the
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Page 12 1 first to the table, and perhaps most importantly,
2 it provides an objective indicator of what is
3 fair. In fact, the coalitions know this is a
4 pattern; that's why they fought so hard against
5 ratification. This is one of the statements from
6 that period, when they said that the UTU deal put
7 their position in jeopardy. There is no reason to
8 say that unless the coalitions realized that the
9 UTU deal would affect them as well. Why else run
10 this frankly brutal campaign against ratification
11 of the UTU agreement? The obvious answer is they
12 knew that once there was a ratified deal with a
13 third of the industry, pattern considerations will
14 apply. And they took their shot at undercutting
15 the UTU and they missed. It's especially notable
16 that even with all of this campaigning, all of
17 this rhetoric, the UTU members still voted to
18 ratify by a 20 percent margin. Clearly, the
19 members of the UTU did not view a 17 percent wage
20 increase as a, quote, rotten deal. And it would be
21 unfair, especially to those UTU employees, to
22 refuse to apply the pattern at this point. That
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Page 13 1 brings me to my second P, preferred position, by
2 which I mean we will show you that railroad
3 employees are, before any increase, already more
4 than fairly compensated vis-@-vis their peers. And
5 we will show you that in terms of total
6 compensation, wages plus benefits, railroad
7 employees are extremely well paid. Moreover, they
8 enjoy a substantial premium in total compensation
9 versus their peers in other industries. On this
10 slide, rail transportation is the group in red, on
11 the left. Other industries are reflected in the
12 bar graphs to the right, so you can see that rail
13 transportation, average total compensation,
14 exceeds all of the comparison industries. In fact,
15 we'll show you that there is a premium here
16 virtually any way you look at it. Versus average
17 unionized private industry, the premium is 24
18 percent; versus the private sector, union and non-
19 union together, it's 46 percent; and versus the
20 transportation sector, the one that is most
21 applicable to the railroads, the best comparator,
22 the premium is over 79 percent. Our expert on
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Page 14 1 compensation and labor economics, Dr. Evans, will
2 address this in greater detail. But it is worth
3 noting in this regard, while I have the reference
4 to private industry up on the screen, that they
5 rely on the rate of growth in private industry
6 wages, and that analysis is misleading for several
7 reasons. First, they've cherry picked a starting
8 point in 1978 rather than looking back for the
9 last ten years or the last several contract
10 rounds. Second, they ignore the fact that railroad
11 employees were starting from a much higher point,
12 as evidenced by the fact that there is still a
13 substantial premium and compensation. And third,
14 there is no acknowledgment in their analysis of
15 the fact that private industry includes extremely
16 high rates of recent wage growth among
17 professionals with advanced degrees. We'll show
18 that contrary to the union's expert report, the
19 compensation premium for railroad employees has
20 actually been growing, from 75 percent in 2006 to
21 79 percent today. More broadly, we will show you
22 that these are really good jobs. They will remain
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Page 15 1 really good jobs, not just in terms of
2 compensation, but in various other respects as
3 well. The fact of the matter is, and I want to
4 emphasize this point, the railroads respect their
5 employees; we want to treat them fairly, and the
6 labor market has reflected that. You will hear
7 this repeated by a number of our witnesses. These
8 are great jobs; they are highly valued and sought
9 after. In fact, we will show you that even before
10 any increases applied, railroads have had no
11 trouble attracting and retaining talent, which is,
12 as we will show, a fair and objective measure of
13 whether compensation is adequate. We will provide
14 you with both anecdotal and empirical evidence of
15 that assertion, showing that rail jobs are
16 increasingly popular. As this slide indicates,
17 applicants per hire are way up. Professor Topel
18 will explain the results of an empirical study of
19 employee behavior which confirms that not only is
20 there intense competition for these jobs, but once
21 in, no one leaves, all of which shows that
22 railroad employees are more than adequately
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Page 16 1 compensated. What this slide shows you is a
2 comparison in quick rates. Other industries are
3 reflected above. The railroads are that cluster of
4 lines at the very bottom, and this will be
5 explained in more detail by people who are smarter
6 than me. But the point is that compensation is
7 keeping people in these jobs. We'll also show you
8 that through - primarily through fact witness
9 testimony, that railroad investments in equipment,
10 technology, have made these jobs increasingly
11 safer, easier, and better in many respects. We
12 will also show you that the current position of
13 railroad employees is especially preferred in the
14 current economic context. The union suggests that
15 the board should ignore this, but there is no real
16 debate. The economy is lousy. Average household
17 income has declined 2.3 percent since 2009.
18 Unemployment is at its worst in decades, shows no
19 signs of abating. GDP growth continues to lag
20 despite stimulus efforts by the administration and
21 despite very low interest rates. So if you
22 consider this context, the broader economy, the
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Page 17 1 market in which railroads compete for labor, and
2 where railroad employees start from in terms of
3 compensation vis-@-vis their peers, then the
4 carriers' proposal is fair. A third basic theme
5 you'll hear from us is peer progression, by which
6 I mean I will show you that the carriers' proposal
7 is fair when you compare the proposed increase in
8 total compensation to other settlements, to
9 various external benchmarks. When you total up the
10 wage increases plus the additional compensation
11 elements in the carriers' proposal, plus the
12 increasing value of benefits, total compensation
13 increase over the next six years exceeds 20
14 percent. We'll show you that these increases are
15 better than both recent and projected increases in
16 the general labor market. We'll show you that the
17 proposed increase is better than other union
18 settlements. This is an aggregate average of
19 settlements across all industries. And we'll show
20 you that the proposal is even better when compared
21 to settlements in the transportation sector in
22 particular. So vis-@-vis their unionized peers in
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Page 18 1 the same industry, this offer is extremely
2 favorable. We'll also show you that the proposed
3 increase far outstrips projected inflation as
4 shown by the Congressional Budget Office,
5 resulting in substantial real compensation growth
6 under the carriers' proposal. I would note here
7 that unlike the unions, we are using a neutral
8 source to project inflation. This is the
9 Congressional Budget Office numbers. We are using
10 a neutral source rather than simply picking a
11 number that suits our case. Needless to say, we
12 believe that doing so makes our data and our
13 assumptions a much more fair and accurate picture
14 of the likely results of real compensation growth
15 under the parties' respective proposals. We'll
16 also show you that even with the modest changes in
17 healthcare plan design that had proposed, our
18 employees will still have a very generous
19 healthcare plan with excellent benefits. And when
20 we say it is generous, we will provide you with
21 objective evidence of that fact. Under the revised
22 plan as proposed, railroad employees will still be
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Page 19 1 doing better than most; far better than the
2 federal government employees, far better than most
3 other unionized employees. And moreover, while the
4 plan design changes bring us closer to the
5 mainstream, the value of employee benefits will
6 continue to increase. At best, the changes
7 proposed will only moderate that rate of increase
8 while employees continue to enjoy a freeze on
9 their own contributions to plan costs. So by
10 whatever measure you use, any peer comparison you
11 choose, this is a fair deal. This brings me to
12 their main arguments: Profits. Well, we will
13 address this head-on. Contrary to the union's
14 predictions, we do not deny that the industry is
15 doing better financially than it has in the past.
16 I am not here to spin a doom-and-gloom story for
17 the industry. And let me be clear: We are not
18 claiming inability to pay; rather, our point about
19 profitability is threefold. First, profitability
20 is not, should not, be important as an economic
21 matter to assessment of fair compensation in the
22 absence of any sort of commitment to sharing the
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Page 20 1 risks of profit variability, but the unions have
2 rejected profit-sharing out of hand. Second, the
3 unions overstate, to at least some extent, the
4 industry's financial health and they understate
5 future risks. Third, even if all is rosy now, it
6 would be foolish to simply assume that current
7 profitability will just continue forever. Some
8 level of prudence and caution is always important
9 in business planning, especially in light of
10 capital requirements of this industry. And
11 frankly, this is not a new debate. The unions
12 always argue profits, all of them, including the
13 United Transportation Union, made essentially the
14 same point in 1996, where they said net income is
15 at a record high, earnings are up, operating
16 ratios continue to fall. And in this proceeding,
17 the one in which the UTU is involved, as the
18 unions note in their own submission, the board
19 rejected that argument, noting that profits alone
20 are not sufficient reason to recommend wage
21 increases, and certainly not above pattern
22 increases. Other boards have said the same thing.
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Page 21 1 Short-term profit should not be a significant
2 consideration unless the unions are willing to
3 accept profit-sharing and thus face the risk of
4 decline in compensation when profits go down. And
5 such risks do exist, much as the unions might wish
6 you to ignore them. The railroad industry is not
7 just an open money spigot. This exists on multiple
8 levels in this very competitive market. And it
9 would be unwise to ignore the larger economic
10 trends and just assume, as the unions have done in
11 their submissions, that traffic and yields will
12 continue to grow indefinitely. If nothing else,
13 the recent experience in 2008 and 2009 should be a
14 stark lesson; that we are still vulnerable to
15 downturns, and when that happens, excess
16 compensation packages do not help. And even if
17 profitability continues, it is worth emphasizing
18 that the carriers are using those profits to
19 reinvest in the industry, which benefits everyone,
20 including the employees. The evidence is clear
21 that reinvestment and income are linked; in other
22 words, the more the railroads invest, the better
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Page 22 1 they do in the future. And spending on variable
2 costs, including labor, inevitably impact the
3 carriers' ability to invest and to grow. Again,
4 this is a highly competitive market and we need to
5 be prudent in spending, reasonable in setting
6 limits, and realistic about the future. In its
7 outer edges, the profitability issues go beyond
8 the scope of this proceeding; they get into social
9 policy questions about wealth distribution that
10 are more appropriate for Capitol Hill. We are not
11 here to debate those issues; we're here to decide
12 what is fair in this agreement. And in that
13 inquiry, considerations or profitability are not
14 unique to these unions. The UTU made exactly the
15 same points across the table in bargaining, and
16 the pattern agreement was the result; that is what
17 is fair in this context. The final one of my five
18 P's is productivity, and I can be fairly brief
19 about this. Has there been a productivity
20 increase? Absolutely. Are railroad employees
21 responsible for it? No. Productivity in the
22 railroad industry is a function of the investments
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Page 23 1 in technology, increased density, and changes in
2 product mix. There is no evidence that employees
3 are working harder now than they were 20 or 30 or
4 40 years ago. If anything, the evidence is that,
5 through technology and improved processes, the
6 jobs have gotten easier. Don't misunderstand. I'm
7 not suggesting that railroad employees don't work
8 hard. I am simply saying that productivity
9 improvements cannot be traced to people working
10 harder than they have in the past. And the irony
11 is that the unions have fought productivity
12 improvements. It's neither fair nor reasonable in
13 those circumstances that they now be paid because
14 of increased productivity, nor is it true that job
15 cuts of 20 years ago justify compensation
16 increases now. The employees who were laid off as
17 a result of mergers and route rationalizations
18 received generous benefits. There is no reason
19 now, a generation later, why the carrier should
20 pay for that again if it is not a rational basis
21 for compensation increases, as our expert, Kelly
22 Eakin, will explain to you. The same is true with
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Page 24 1 respect to the union's reliance on declining unit
2 labor cost, which is one of their key points. The
3 unions ignore the fact that revenue can increase,
4 and therefore unit labor cost can decline for
5 reasons that have absolutely nothing to do with
6 labor, such as increasing prices. In fact,
7 declining unit labor cost has more to do with the
8 railroad's capital investments over the last 30
9 years than anything intrinsic to labor. It is not
10 credible to claim that changes in unit labor cost
11 justify compensation increases, just as it's not
12 fair to reward employees for productivity growth
13 that they did not generate. That brings me to the
14 end for now. In our case-in-chief, you'll be
15 hearing a lot of numbers from us; a lot of charts,
16 a lot of data, a lot of empirical analysis. The
17 unions in their submission predicted colorful
18 graphs, and I would hate to disappoint them. But
19 overall, I think you'll find that our presentation
20 is dispassionate, it is measured, it's reasonable,
21 and it is grounded in hard numbers and modern
22 economic theory. Prior to the opening of our case-
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Page 25 1 in-chief, I will give you a brief roadmap to that
2 presentation, including the order of witnesses and
3 the subjects of their testimony. But the thought
4 that I will leave you with is that underlying all
5 of these numbers, all the charts, all of the
6 evidence, is a small set of core ideas. There is a
7 pattern; it will ensure that railroad employees
8 remain among the best-paid workers in America with
9 excellent benefits, and that is more than fair.
10 Thank you for your attention.
11 CHAIRMAN JAFFE: Thank you, Mr. Munro. At your
12 convenience Ms. Parcelli.
13 MS. PARCELLI: I'm sorry, could you repeat?
14 CHAIRMAN JAFFE: I said, "At your convenience."
15 MS. PARCELLI: Thank you. Let me just get myself
16 set up. Mr. Chairman and Board Members, again, my
17 name is Carmen Parcelli and I am counsel to the
18 Coalition of Rail Unions or CRU. Now there are
19 eleven organizations in total before this
20 Emergency Board and they are aligned in two
21 coalitions. Collectively they represent 73 percent
22 of rail labor. This morning I am speaking on
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Page 26 1 behalf of both coalitions in support of their
2 joint proposal to this Board. Now the CRU consists
3 of five organizations. They are the American Train
4 Dispatchers Association, the International
5 Brotherhood of Electrical Workers, The
6 International Association of Machinists and
7 Aerospace Workers, the Transportation
8 Communications Union, which includes its
9 Brotherhood of Railway Carmen division, and also
10 the Transport Workers Union. Now the RLBC consists
11 of six unions. They are the Brotherhood of
12 Locomotive Engineers and Trainmen, the Brotherhood
13 of Maintenance of Way Division Employees Division,
14 Brotherhood of Railway Signalmen, the
15 International Brotherhood of Boilermakers and
16 Blacksmiths, the National Conference of Firemen
17 and Oilers, and the Sheet Metal Workers
18 International Association. Now, I list all of the
19 organizations at the outset, in part, because just
20 by giving their names I think I convey a sense of
21 the great diversity that exists among these
22 organizations and the crafts that they represent.
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Page 27 1 Among the Coalitions, we have both operating
2 crafts, that is the engineers and trainmen, and
3 non-operating crafts. Among the non-operating
4 crafts, there are crafts that you find in the
5 engineering departmentsthose are maintenance of
6 way and signalmen, as well as the shop crafts, the
7 train dispatchers and the clerical craft which is
8 aencompasses a wide variety of positions. Given
9 this diversity, the fact that all eleven
10 organizations come before you united under the
11 banner of their joint proposal is quite
12 remarkable. Recently on various commuter railroads
13 and also at Amtrak, we have seen this kind of
14 coordination and unity on the labor side. But in
15 the case of the national reight frailroad
16 (ph)railroads, however, this is a true first. Now
17 at the outset and on behalf of both Coalitions, I
18 would like to thank the Board Members for agreeing
19 to serve in these proceedings. You know, among the
20 many unique and somewhat odd features of the
21 Railway Labor Act are PEB proceedings. You know,
22 almost always under the RLA the parties negotiate
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Page 28 1 for a considerable period of time, both in direct
2 negotiations and then in the mediation process.
3 That is as the parties have done in this
4 proceeding as well. So in contrast to the kind of
5 leisurely pace that you find in negotiations, once
6 a release occurs, we travel at warp speed. So we
7 thank you very much for making yourselves
8 available. I am sure that there was considerable
9 juggling of schedules in order to be here with us
10 and we truly do appreciate it. We also wish to
11 thank you for taking on the demands of a
12 proceeding such as which, of course, is made all
13 the more formidable by the compressed time
14 schedule of the Railway Labor Act. So if there is
15 anything that the organizations can do to make the
16 work of this Board an easier task to undertake,
17 you need only ask. Now at the outset I would like
18 to briefly give a review of the Coalition's joint
19 proposal. It can be found as Exhibit 1 in our
20 materials and I believe it was also circulated for
21 Board Members even prior to our submissions. So
22 just in a nutshell, the proposal is this: First,
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Page 29 1 19 percent general wage increases over five years.
2 Five years. Maintenance of the status quo in terms
3 of health and welfare which means that employee
4 healthcare contributions will remain at $200 per
5 month unless and until changed in the next round
6 of bargaining. We also seek improvement in
7 vacation benefits, generally by adding an
8 additional week depending on years of service. We
9 also asked for a proration of vacation benefits
10 for employees who would otherwise not qualify for
11 any vacation benefit at all under the existing
12 rules and the proration would be based on the
13 number of days that they work in the prior year.
14 Fourth, we ask for a restoration of the ratio of
15 supplemental sickness benefits to pay which
16 existed and the conclusion of the last agreement.
17 We also ask that these ratios be maintained with
18 subsequent general wage increases. We also seek
19 agreement that the carrier shall provide the
20 organizations with certain basic information
21 reasonably necessary for both contract
22 negotiations and grievance handling. We seek a
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Page 30 1 standard savings clause that preserves more
2 favorable terms which may exists or be negotiated
3 on a local basis. And finally, we seek five-year
4 contract duration from January 1 2010 through
5 December 31, 2014. All organizations are united in
6 this proposal. It represents a fair settlement of
7 this dispute. Our demands are fully justified and
8 we are prepared to demonstrate that through these
9 hearings. Now Don said he would save his, but I am
10 going to give now a summary of the presentation we
11 intend to bring before the Board. The case for our
12 joint proposal will be supported by the testimony
13 of several witnesses. We will have TCU President,
14 Bob Scarletti, and BRS President, Dan Pickett. So
15 they will give the Board introductory remarks
16 including an overview of the essential
17 justifications for our proposal, especially in
18 light of the rail industry's robust financial
19 returns and labor's contribution to the carriers'
20 prosperity. They will also respond to the
21 carriers' proposal, of course based on the NCCC's
22 agreement with the United Transportation Union,
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Page 31 1 UTU. And they will explain to this Board why the
2 terms of the UTU agreement are unacceptable to the
3 Coalition. We will next turn to the expert
4 testimony of Tom Roth of the Labor Bureau. Mr.
5 Roth is a labor economist with particular
6 expertise in rail labor issues. He has appeared
7 before numerous past PEBs and he will address
8 several topics. He is going to discuss the current
9 financial condition of the railroad industry with
10 particular emphasis on the fundamental changes
11 that have allowed the carriers now to produce
12 their record-breaking profits. He will also
13 analyze the Coalition's joint proposal in terms of
14 wage trends, overall costs, and the carriers'
15 ability to afford the proposal which apparently
16 they don't' deny. He will also compare the value
17 of the Coalition's proposal to the proposal
18 offered by the carriers. And then on health and
19 welfare issues we are going to have three
20 witnesses. First we will have Bill Hildebrand,
21 BMWED Executive Assistant to the President. He
22 will testify regarding the development of the
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Page 32 1 National Health and Welfare Plan which really was
2 designed to suit the particular needs of railroad
3 employees who work in a dangerous profession. He
4 will also discuss the history of joint labor and
5 management oversight of that Plan. Lastly he will
6 explain the history and development of the
7 separate health and welfare plan that is
8 maintained by the carriers and the UTU. Next we
9 will rely on expert testimony from Glen Kowalski,
10 Principal Consulting Actuary with Cheiron, which
11 is a nationally recognized benefits consulting
12 firm. He will address the costs of the national
13 plan, particularly the lower than average increase
14 since the parties' last agreement. He is also
15 going to present to us some relevant market
16 comparisons. He will also address the effect of
17 the carriers' proposal on participants and the
18 impact on the finances of the Plan. And lastly in
19 terms of health and welfare, we will hear from TCU
20 Vice-President Joel Parker and he will discuss how
21 health and welfare relates to our proposal overall
22 and the carriers' proposal overall. Now with
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Page 33 1 respect to vacation benefits, Bill Bohne, IBEW
2 Director of the Railroad Department, will discuss
3 these issues. He will go through the history of
4 the National Vacation agreements in the industry
5 and how the benefits in those agreements have
6 failed to keep pace with the benefits enjoyed by
7 other U.S. workers. Then Dennis Pierce, President
8 of the BLET, will also present regarding the
9 justifications for our vacation proposal. Next we
10 are going to bring Mr. Roth back to explain the
11 Coalition's proposal regarding supplemental
12 sickness benefits which merely seeks to maintain
13 the level of benefits agreed to in the past. And
14 then finally, we will hear from Roland Wilder,
15 attorney for the RLBC, and experienced labor
16 counsel, and he will give a presentation regarding
17 the Coalition's information request proposal which
18 simply seeks basic information sharing between the
19 parties as an aid to collective bargaining and
20 grievance handling. So following the witness
21 testimony regarding the Coalition's joint
22 proposal, each Union will also give testimony that
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Page 34 1 relates to its craft-specific proposals, but we
2 will save and introduce those witnesses to you
3 later in conjunction with their testimony. Now
4 there are two over-arching issues in this case and
5 I intend to spend my time this morning addressing
6 those. First is what I refer to as the financial
7 or the economic case. The second, of course, is
8 the pattern argument, based on the UTU agreement.
9 Now having read the Carriers' written submissions
10 we appear to be in agreement that these are the
11 fundamental issues in this case, which really
12 transcend the specifics of both sides' proposals.
13 Now of course, the Carriers understandably reverse
14 the order of the two issues, emphasizing pattern
15 above all else. At its heart, our financial case
16 rests upon basic notions of fairness and equity
17 and simply stated by PEB 2-26 where the Carrier
18 is, quote, a thriving enterprise, it is proper
19 that the Carrier shares this success with its
20 employees. Profitability, usually described as
21 ability to pay, is nearly always a factor
22 considered in PEB proceedings, or in interest
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Page 35 1 arbitration more generally. To try and argue
2 otherwise is to swim against a strong tide. And we
3 know because we have tried. Moreover, in some
4 cases ability to pay is not just one factor among
5 many, but becomes a central focus. Most obviously
6 this happens when a Carrier is failing
7 financially. But we submit that ability to pay
8 should likewise be a central focus when a Carrier
9 is extremely profitable. And the Carriers before
10 this Board are extremely profitable. There is
11 really no debate about that. I think we heard
12 that. In an otherwise dim financial period for
13 this country, the railroads have been and are a
14 shining light. In fact their performance is so
15 good it is difficult not to sounds somewhat
16 hyperbolic in describing it. So that is why we
17 have largely preferred to let the financial
18 numbers speak for themselves. So I am not going to
19 stand here this morning and recap all the
20 financial metrics. Those are summarized in our
21 opening submission and our economist, Tom Roth,
22 will walk the Board through all the various ways
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Page 36 1 in which the robust financial health of the
2 Carriers is measured. I did, however, want to
3 highlight one financial figure that really stands
4 outat least for me. And that is the amount spent
5 by the Carriers, the four major Carriers, on stock
6 repurchase programs from 2006 through 2010. Of
7 course stock repurchase simply involves buying
8 back shares from stockholders and thereby
9 decreasing the number of shares in circulation and
10 driving up the price per share. Okay? Stock
11 repurchases are something that cash-rich companies
12 do. It give the stock prices at least a short term
13 boost. Often repurchase signals that management
14 believes the company is undervalued. The four
15 majors collectively spent over $2 billion in share
16 repurchases in 2006, over $6 billion in 2007, over
17 $5 billion in 2008 and over $3 billion in 2010
18 when they resumed their repurchase programs. That
19 is a total of $16 billion over the last five
20 years. In addition, the three publicly traded
21 majors, that is CSXT, NS and UP, have already
22 announced that they plan to further reduce shares
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Page 37 1 in 2012 and 2013 by at least three percent each
2 year. Having engaged in a truly ostentatious
3 series of these stock buy-backs, and with plans
4 for more of the same, the Carriers still insist
5 that labor is demanding too much. But as a key
6 point of comparison, for all the Carriers before
7 this Board the total cost impact of our joint
8 proposal is valued at $4.9 billion over five
9 years. Thus we are asking $4.9 billion for labor
10 as compared to $16 billion and counting in stock
11 buy-backs. How then are we asking too much? Now
12 the Carriersand I think we heard itreally cannot
13 deny the obvious fact that they are very
14 profitable companies. It doesn't appear that they
15 are seriously going to try to do so before this
16 Board. Instead so, they assert that recent gains
17 are, quote unquote, fragile and that the future is
18 clouded with uncertainty and risks. Just as an
19 aside, if the Carriers' position is fragile, then
20 pouring billions of cash in to past stypast stock
21 buy-backs with more of the same planned, seems
22 ill-advised to say the least, if you are in a
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Page 38 1 fragile condition. But that is an aside. In any
2 event, we plan to explain, and have done so at
3 length in our written submission, that the
4 Carriers' current performance is no mere flash in
5 the pan. Okay? Instead their current health is
6 attributive to deep structural changes that took
7 place in the industryderegulation of most rate-
8 setting under the Staggers Act. Massive
9 abandonment of unprofitable lines both before and
10 after deregulation. A wave of consolidation which
11 has left only four majors and a variety of
12 technological advances, most significantly,
13 intermodal. These fundamental changes and years of
14 steady build have set the table for the current
15 bounty. No one is forecasting that the industry
16 fundamentals will suddenly alter. As for the
17 laundry list of vague potential risks that the
18 Carriersthat appeared in their Summary of
19 PositionI'm referring to page 26none of those
20 future potentialities are unknown to the markets.
21 Indeed, the Carriers cite such risks as changes in
22 fuel price and the impact of weather-related
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Page 39 1 events. Investors know these things and yet they
2 continue to view rail equities and stocks to buy
3 and hold forever. They view them as stocks to buy
4 and hold forever. Stuck before this Board with the
5 inconvenient fact of double-digit profits, it
6 appears that the Carriers will also attempt to
7 argue that profprofits simply don't matter. As
8 stated in their Summary of PositionI am referring
9 to page 24, quote, as a matter of labor economics,
10 employer profitability is not and has never
11 beenhas never beena consideration in setting
12 appropriate levels of employee compensation. That
13 is quite an extreme position to stake out. I will
14 be interested to hear their experts defend that
15 position. Suffice it to say it is not a view that
16 we believe most labor relations professionals
17 would agree with and it certainly lacks support in
18 past PEB decisions. In addition to claiming that
19 profits never matter, the Carriers also assert,
20 inconsistently, that profits only matter when
21 employees have accepted cuts in the past. Even if
22 you accept the notion that past sacrifice is
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Page 40 1 required in order to share in the financial good
2 times, the employees before you have given. PEB
3 219 where the Carriers argued vigorously that
4 their financial position was precarious and
5 unfortunately were believed. Led to a two-year
6 wage freeze, to dramatic changes in health and
7 welfare which directly targeted employees'
8 pocketbooks. There were also very substantial
9 changes in terms of work rule concessions. As Tom
10 Roth will explain, rail employees have never fully
11 recovered from PEB 219. And in addition, the
12 structural changes in the industry have exacted
13 their heavy toll. Jobs lost, displacements, the
14 demands of changing technology to name but a few.
15 Thus, if sacrifice is required to claim a share of
16 the Carriers' profits, then these employees
17 deserve a full helping of the pie, not merely the
18 dieter's portion that the Carriers are offering.
19 Okaypattern. It is a word that looms large in
20 nearly every PEB proceeding and as a result there
21 is a substantial body of PEB precedent that is
22 built up regarding the pattern principle. Those
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Page 41 1 precedents address both what constitutes a pattern
2 and if there is a pattern, what that pattern
3 consists of. So here we have the Carriers
4 contending that an agreement formed with only one
5 organization representing only 27 percent of the
6 workforce sets a pattern that eleven other
7 organizations should follow. To call such an
8 agreement a pattern would be a substantial
9 departure from past PEB decisions. It would also
10 be very detrimental to healthy bargaining and
11 labor relations in the industry. Past PEBs have
12 been clear. In order to serve as a guide for other
13 recommended settlement, a claim pattern must be,
14 quote, clearly established and ascertainable.
15 According to past Boards, this requires proof of
16 pattern settlements covering a majority of
17 employees. Thus in PEB 178, one I don't think Don
18 referred to, agreements with four shop-craft
19 unions covering 23 percent of employees did not
20 constitute a pattern. As that Board wrote, quote,
21 to adopt the pattern argument as decisive under
22 these circumstances it seems to us, would be to
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Page 42 1 push it to unreal proportions. Likewise, PEB 66
2 had settlements reached with one-third of
3 employeessaid that did not constitute a pattern.
4 In PEBs 228 and 230, settlements with three unions
5 covering 45 percent of employees were
6 characterized as an emerging pattern which would
7 not be afforded presumptive weight or controlling
8 weight. And PEB 186 found that, quote, 60 percent
9 is not an overwhelming pattern figure. Sixty
10 percentnot overwhelming. In fact, the vast
11 majority of PEBs have turned to the pattern
12 principle in cases where 80 or 90 percent of
13 employees have settled. So why have past PEBs
14 insisted on a majority in order to find a pattern?
15 Well they have so held because settlements with
16 only a minority simply do not provide sufficient
17 evidence of broad acceptability among employees.
18 But in the face of the sound policy adopted all
19 these presidentprecedents, the carriers still ask
20 this Board to push the pattern principle to unreal
21 proportions. This Board should not. Now not only
22 does UTU represent only a minority of employees,
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Page 43 1 it is also only one union. As far as we are aware,
2 including our review of the pattern cases that the
3 carriers have cited in their submissions, no PEB
4 has ever found that an agreement reached with only
5 one union constitutes a pattern for all others to
6 follow. And it is clear why an agreement reached
7 with only one union should not be adopted as a
8 pattern. An agreement formed by only one union may
9 merely reflect the unique concerns and
10 circumstances of that organization. And we know
11 that to be true in this case. In fact, the
12 circumstances under which the UTU reached its
13 agreement with the Carriers could not be more
14 unique or idiosyncratic. As explained in our
15 papers, in May of 2in May of 2007, the UTU entered
16 into an agreement to merge into the Sheet Metal
17 Workers. Now under the terms of the merger
18 agreement on January 1 of 2008, the UTU was to
19 cease to exist as a standalone labor organization
20 and it was to become a division within the Sheet
21 Metal Workers. Before the merger could be
22 implemented, however, a group of UTU members sued
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Page 44 1 to repudiate the merger asserting they had been
2 misled about the terms by both the UTU's former
3 leadership and the Sheet Metals. Although the UTU
4 initially opposed the lawsuit to enjoin the
5 merger, after a change in top leadership, the
6 union reversed position and supported the
7 injunction. Some UTU officers, however, continued
8 to support the merger. So a flurry of additional
9 litigation ensued and eventually a federal court
10 ruled that UTU's challenges to the validity of the
11 merger should be trexcuse meshould be determined
12 under the arbitration provisions of their merger
13 agreement. And so law professor, Michael Gottesman
14 was selected to act as the arbitrator. And on this
15 very Monday, Arbitrator Gottesman ruled on the
16 issue and ruled that the merger between the two
17 unions was properly consummated and that, quote,
18 the merger should be implemented at the earliest
19 possible date. He also found that the UTU had been
20 in continuous breach of the merger agreement from
21 January 2008 to the present. Where now in this
22 long running saga? I don't know. I suspect the
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Page 45 1 parties are still sorting out their respective
2 positions in the wake of Arbitrator Gottesman's
3 award. So perhaps we'll learn more over the course
4 of these proceedings. I will say of my colleague,
5 Roland, the Sheet Metal Workers are part of his
6 coalition, the RLBC, would like to say a few words
7 after my opening on this topic. The carriers, of
8 course, were always fully aware of the dispute
9 over UTU status as an independent organization. In
10 fact, at the beginning of negotiations with the
11 carriers it was unclear whether it would be the
12 UTU or the Sheet Metal Workers who would be
13 engaged in national handling. However, both the
14 UTU and the carriers took the position that UTU
15 was the proper party. And now these carriers want
16 the board to recommend an agreement formed by a
17 union engaged in, frankly, one of the messiest
18 internal battles that one can imagine. You know it
19 is really difficult to believe that the bitter
20 internal strife caused by the merger struggle did
21 not impact the decision making of the UTU
22 leadership at the bargaining table. It's just
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Page 46 1 difficult to believe. But even beyond the merger
2 mess, the UTU agreement is clearly a deal targeted
3 to the unique concerns of employees represented by
4 that organization. As you will hear in testimony,
5 the UTU has gone its own way in terms of health
6 and welfare issues since 1999 when the union
7 formed its own healthcare plan with the carriers.
8 You know the UTU also believe that it had obtained
9 considerable advantage from removing some topics
10 from national handling and relegating them to
11 local handling where they felt that they could
12 ultimately walk away from these issues if the
13 carriers weren't offering a significant enough
14 value for them. You know in short the agreement
15 just speaks largely to the particular interests of
16 UTU represented employees and for that reason too
17 should not constitute a pattern. And there's yet
18 another reason to refuse the pattern argument and
19 that is the potential impact of coalition
20 bargaining among rail labor. UTU is the only union
21 in this round of negotiations and the last not to
22 bargain as part of a coalition. Now for decades
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Page 47 1 the carriers have complained about having to
2 negotiate separately with a host of different
3 labor organizations. They've complained about
4 rivalries among the unions and how that's
5 destabilizing. They've argued that the pattern
6 principle is necessary to present one organization
7 from attempting to leapfrog ahead of another. But
8 now there are two major coalitions negotiating
9 jointly, having placed any rivalries to the side,
10 and seeking common terms not one-upmanship. And
11 what do the carriers do in response? They focused
12 on making a deal with the one organization that
13 was negotiating on an independent basis. We submit
14 that this board should not validate the carrier's
15 attempt to circumvent our coalitions by blessing
16 an agreement reached as a pattern for all of us.
17 Oh I think I might have said one final point too
18 soon. I have one final point with respect to
19 pattern. The carriers claim before this board that
20 they are offering terms to us which are comparable
21 in that value to the terms of the UTU agreement,
22 Don addressed this, but they are not. Tom Roth
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Page 48 1 will walk the board through the specifics on this,
2 but I'll just give you one example. The carrier's
3 proposal includes the elimination of the fifth
4 year of reduced wage scales for new hires just as
5 it's provided for in the UTU agreement. However,
6 most of the organizations before this board did
7 not have wage progressions as long as five years.
8 For example, Maintenance of Way has a two year
9 wage progression. And the TCU clericals have a
10 three year wage progression. Therefore elimination
11 of a nonexistent fifth year is meaningless for
12 most of the employees before you. So the claim of
13 pattern is just false from beginning to end
14 because the carriers are not even offering us
15 terms equivalent to the UTU agreement. The UTU
16 agreement, which even the carriers admit, is not
17 as good as the agreements that we reached in the
18 last round of bargaining. In closing, I just want
19 to share one final point. This really is final.
20 Railroads always have been and are still a world
21 of their own. They have the Railway Labor Act
22 which they only share with the airlines. There is
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Page 49 1 an entirely separate federal retirement program
2 for railroad employees in lieu of social security.
3 There's also a federal unemployment insurance
4 system only for railroad workers. The railroads
5 are governed by federal entities devoted solely to
6 the industry such as the Surface Transportation
7 Board, the Federal Railroad Administration, the
8 National Railroad Adjustment Board, and now the
9 railroads have set themselves apart in an
10 additional respect. They are able to maintain
11 record breaking profits even through a
12 recessionary period and out perform nearly all the
13 rest of American industry in terms of every
14 commonly used financial metric. So as the carriers
15 present their parade of experts who will seek to
16 compare our jobs to those of workers in other
17 industries and explain how our healthcare benefits
18 are out in the mainstream, we urge you to keep in
19 mind this simple truth. The railroads are and have
20 always been a world apart. Railroad employees
21 deserve a settlement that reflects the unique
22 circumstances of their world. The coalition's
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Page 50 1 proposal accomplishes this. We submit that the
2 board should recommend its terms. Thank you.
3 CHAIRMAN JAFFE: Thank you Ms. Parcelli. Mr.
4 Wilder.
5 MR. WILDER: Mr. Chairman and members of the board,
6 over my years of association with Carmen I've
7 learned that she means what she says. She said a
8 few words and she means it, and there will be only
9 a few words. As indicated our firm is counsel for
10 the Rail Labor Bargaining Coalition. What that
11 means is that we are the bargaining agent for the
12 six constituent organizations that belong to the
13 RLBC. None of those organizations is the Sheet
14 Metal Workers' International Association. The
15 Sheet Metal Workers have represented shop craft
16 employees in the rail industry for over 100 years.
17 Recently the Sheet Metal Workers and the UTU
18 decided to merge. The entered into a merger
19 agreement and formed a constitution known as the
20 SMART organization. Recently on Monday Arbitrator
21 Michael Gottesman, in a long awaited award,
22 concluded that the pattern of conduct engaged in
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Page 51 1 by the United Transportation Union over the time
2 from the entry into and the effective date of the
3 merger agreement and the SMART constitution
4 constituted a "continuous breech" of those
5 documents. Now the legal implications of the award
6 on a whole host of UTU actions over the period in
7 which the merger agreement was in effect is
8 something that will be sorted out largely in other
9 forums. What the UTU. Excuse me. What the sheet
10 metals workers have instructed me to advise you
11 this morning is that its position is that the
12 actions in continuous breech of the merger and the
13 SMART constitution include the entry by the UTU
14 into the agreement with the carriers that is
15 portrayed as setting a pattern for the industry.
16 As I say, the legal implications of this will be
17 played out, I expect, in a different forum. We do
18 not intend to attempt to obtain any type of
19 resolution of these problems here, but you had to
20 know the Sheet Metal Workers' position in this
21 point. Thank you.
22 COURT REPORTER: Take five.
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Page 52 1 CHAIRMAN JAFFE: We're running ahead of schedule
2 which actually pleases us to no end because we've
3 got a very full docket. Why don't we take just a
4 few moments and then we'll be ready to start with
5 the carriers' case. It's now 10:10. Maybe 10:20
6 everybody back and ready to roll. Thank you. We're
7 off. (inaudible at 0:09:56) If everyone could
8 please take their seats.
9 COURT REPORTER: You could speak into the
10 microphone.
11 CHAIRMAN JAFFE: I could do that. If everyone could
12 please take their seats so we could resume. Back
13 on the record please.
14 MR. MUNRO: Mr. Chairman, members of the board
15 we're now ready to move to the carriers' case in
16 chief. I'd like to start by just providing a
17 roadmap for our presentation. The initial
18 presentation will be by Mr. Gradia, the Chairman
19 of the NRLC, who will provide you with a summary
20 of the carriers' perspective on this bargaining
21 round, the UTU pattern, and how it relates to the
22 carriers' proposals. We'll then move to the bulk
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Page 53 1 of our case which is the total compensation
2 analysis which consists of a number of different
3 components. First we'll hear from Doctor Murphy
4 who will set forth his theory of compensation.
5 Second, Doctor Evans will testify regarding
6 benchmarking. Third, we will have a short
7 presentation in two parts on productivity. Doctor
8 Eakin will testify regarding the big picture on
9 productivity, and then Lance Fritz, the Chief
10 Operating Officer of Union Pacific, will provide
11 the case study in productivity. We'll then move to
12 the evidence of adequate compensation from
13 employee behavior including a presentation by
14 Doctor Topel on retention and turnover as well as
15 a statement by Lisa Mancini, the Executive Vice
16 President of Human Resources, from CSX who'll add
17 some color to that topic. That will conclude the
18 presentation today. For tomorrow we hope to begin
19 with a presentation by BNSF Chief Executive
20 Officer Matt Rose on railroad economics followed
21 by a statement by Mark Manion, the Chief Operating
22 Officer at Norfolk Southern regarding safety. If I
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Page 54 1 had my druthers I would have had Mr. Manion follow
2 Ms. Mancini given that that is part of our package
3 on the concept of railroad jobs and the nature of
4 railroad jobs but witness availability trumps all.
5 That will be the end of our presentation on total
6 comp. From there we'll move directly into
7 healthcare. Our presentation by Ben Boley and Dave
8 Scofield on the nature of the plan design changes
9 followed by two expert witnesses one on
10 prescription drugs and the other on medical care.
11 The end of the day tomorrow will follow the
12 healthcare case with two relatively brief
13 presentations; one on wages by my partner Brian
14 Easley. Because wage is a component of total
15 compensation many of the same principles apply.
16 Mr. Easley will simply explain the same points
17 that we've made with respect to total comp are
18 equally applicable with respect to wages. Last
19 we'll have an overview of the carriers' position
20 on work rules by Carter DeLorme. Since our
21 affirmative case is no work will change this will
22 be a brief presentation. We will be prepared to
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Page 55 1 respond to the unions request for workable changes
2 in our rebuttable case next week. We'll have a
3 brief conclusion by me and/or Ken at the end of
4 the day tomorrow. We hope to get you out of her
5 well in advance of the 5:00 p.m. deadline. With
6 that I will introduce our first witness. Ken
7 Gradia is the Chairman of the National Railway
8 Labor Conference and the chief negotiator for the
9 railroads in this round of bargaining. He has been
10 with the NRLC for a very long time.
11 MR. GRADIA: It seems longer all the time.
12 MR. MUNRO: Thank you.
13 CHAIRMAN JAFFE: That's fine. May I ask the
14 reporter to swear in the witness please?
15 COURT REPORTER: Raise your right hand. Do you
16 swear the testimony you're about to give in this
17 case will be the truth, the whole truth, and
18 nothing but the truth under penalty of law?
19 MR. GRADIA: I do. Mr. Chairman and members of the
20 board good morning. Don thank you for the
21 introduction. I understand that there may be some
22 problems with acoustics. If there are problems
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Page 56 1 during my presentation and I don't see them,
2 please make me aware, someone, and I will try and
3 speak up so folks can hear me.
4 COURT REPORTER: Pull that mic a little bit closer.
5 MR. GRADIA: Closer? Does that work?
6 COURT REPORTER: Great. Thank you.
7 MR. GRADIA: At the outset I want to emphasize that
8 nothing we will say in these presentations should
9 be taken as a criticism of our employees or their
10 bargaining representatives. In the heat of
11 collective bargaining disagreements and this is
12 the last however, most recently since 1996 in rail
13 freight bargaining, we should not lose sight of
14 our shared interest in the continued success of
15 our industry. I've spent most of my professional
16 career, as Don recounted, in railroad labor
17 relations working with all of the idioms in this
18 room. Occasional profession disagreements have not
19 and do not in any way detract from my respect for
20 their contributions. Collective bargaining works
21 best when management and labor work together
22 diligently and creatively to fashion agreements
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Page 57 1 that address each side's needs in a fair and
2 reasonable manner. And in a multi employer, multi
3 union environment such as ours pattern bargaining
4 plays an especially critical role in fostering
5 voluntary settlements and ultimately labor
6 stability. Indeed rail management and labor have
7 followed that formula successfully in the last two
8 bargaining rounds negotiating a succession of
9 voluntary settlements founded on pattern setting
10 agreements. If that process is a founder then
11 bargaining will inevitably break down if one side
12 or the other refuses constructive engagement on
13 critical issues or is determined to substantially
14 surpass what other unions have achieved across the
15 table. And that's the dynamic that's really at the
16 heart of this proceeding. The unions in this
17 dispute dismiss our agreement with the UTU, a
18 voluntary settlement, covering the employees
19 represented by the single largest rail union as
20 utterly inconsequential. They demand substantially
21 more in wages and additional compensation plus
22 enhanced benefits, but they refuse to even
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Page 58 1 consider one of our principle issues health plan
2 reform. And for these reasons the stakes are much
3 higher than simply the terms and conditions of our
4 next agreement. At its most fundamental level this
5 proceeding is about the present and the future
6 course of national bargaining in our industry.
7 Your recommendations will inevitably heavily
8 influence the outcome of this bargaining round.
9 And that in turn will influence future actions,
10 strategies, and decisions both of rail management
11 and of rail labor. Pattern bargaining in this
12 industry in national handling is a long settled
13 expectation. It demonstrably serves critical
14 interests of all of the stakeholders not just the
15 parties, that's to be sure, but also the National
16 Mediation Board, our customers, and ultimately the
17 public interest. Every labor organization
18 including the ones before this board has reaped
19 the benefits and the protections afforded by
20 pattern bargaining at various times in past
21 bargaining rounds. We believe that adherence to
22 pattern principle is essential to lay the peace
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Page 59 1 and stability, that the UTU agreement does indeed
2 constitute a pattern, and that this board should
3 recommend application of that pattern to resolve
4 the bargaining disputes before you. My
5 presentation will address all of those points, but
6 let me begin with an overview of our proposal.
7 There are four elements, four pieces, to our
8 proposal and that proposal is, of course, based on
9 the UTU national agreement. The first piece is
10 wages. Our proposal is 17 percent over six years,
11 18.24 compounded. Second piece is special
12 compensation adjustments. There are two that were
13 found in the UTU agreement one dealing with entry
14 break disposition the other with certification
15 pay. Third piece is package of planned design
16 changes that in our view and, as we will explain,
17 will help curb overuse of healthcare services and
18 thereby help contain the incessant increase in
19 escalation of plan costs. And final piece is work
20 rules. The disposition are a no change. The UTU
21 agreement as we will explain with the exception of
22 a very minor rule does not contain work rules, but
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Page 60 1 does contain a mechanism for referral of selected
2 issues that parties have engaged in bargaining to
3 local handling. In sum our proposal would provide
4 roughly 21 percent in increase in total
5 compensation over the six year period taking into
6 account the cost of benefits. A little later I
7 will get into much more detail about each of those
8 elements, but I want to begin my presentation here
9 with a brief history of how bargaining ensued in
10 this bargaining round. As you can see there are
11 three basic groups on the union side bargaining in
12 this round, Railway Labor Bargaining Conference,
13 The UTU and its yard masters division, and what we
14 term here the TCU Bargaining Coalition which I
15 believe they are referring to themselves as CRU
16 for the purposes of this proceeding. On our side
17 these are the participating railroads consisting
18 of four major carriers, Class one's two smaller
19 Class one railroads and a collection of smaller
20 regional and local carriers. Together the carrier
21 group represents some 95 percent of the industry.
22 Let me make a brief comment about something that
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Page 61 1 was presented in the opening remarks from the
2 union counsel. I think I heard it accurately that
3 there was an implication or a suggestion that both
4 the CRU and the RLBC were negotiating in a joint
5 or coordinated basis. That is simply not factually
6 correct. They are joined together at this
7 proceeding. In the course of the bargaining,
8 however, they certainly bargained on their own.
9 Did they coordinate outside of the bargaining
10 environment? That I don't know, but they did not
11 bargain together. They were not bargaining in any
12 way jointly at least as far as I could tell. The
13 second point I want to make is this. At the
14 inception of bargaining we approached all of these
15 groups in the same manner. We presented two them
16 an indication of the areas that we thought were
17 most important, and we invited engagement. Each
18 side had the full opportunity to take us up on our
19 offer to proceed we hoped constructive engagement
20 leading to agreement. As I will detail in a bit
21 UTU took us up on that. The other two union groups
22 did not, and that is why we are here today. (audio
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Page 62 1 interruption) Round of National Bargaining where
2 we've had this basic alignment. Last time, it
3 worked out a little differently. In that round,
4 this was the 2005 National Bargaining Round, the
5 first deal reached in National Bargaining was with
6 the RLBC. And ultimately, it was the UTU that
7 faced and ultimately accepted a patterned
8 settlement. But to be sure, there was a pattern
9 established and followed throughout that round. It
10 so happened that the RLBC negotiators set that
11 pattern in the deal that we struck with them. Now
12 the unions have suggested that (inaudible) places
13 that the last round settlement supports a
14 recommendation for even higher wage disposition
15 here. And in my judgment, that experience is more
16 properly viewed as a cautionary tale, and as a
17 cautionary tale about fixed labor costs and costs
18 and economic unpredictability. In that settlement,
19 we agreed to a 17 percent wage package. The
20 settlement occurred in early 2007. It's a five-
21 year deal, running through 2009. As I said, that
22 became the pattern for all the organizations.
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Page 63 1 Unfortunately, like most businesses, when that
2 deal was cut, we did not foresee the economic
3 catastrophe just around the corner. It so happened
4 that the deal struck was back loaded with the
5 largest wage increases occurring in 2008 and 2009;
6 four percent in 2008, four and a half percent in
7 2009. As it turned out, of course, those increases
8 far exceeded both the labor market and inflation,
9 and worst of all, kicked in at the very time.the
10 worst possible time in the teeth of the great
11 recession. So, if anything, we think two lessons
12 are properly drawn from that experience. It's a
13 clear admonition to all, now granting excessive
14 wages, particularly in times of economic
15 uncertainty and a need for moderation in this
16 round. Let me turn to the history of the
17 bargaining with the UTU. Next slide, please. We
18 commenced negotiations with UTU early in the.2010,
19 and ultimately reached a deal with UTU in April of
20 2011. As you can see from this slide and the next,
21 the UTU leadership strongly endorsed the deal in
22 no uncertain terms. And the membership agreed. The
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Page 64 1 deal was ratified ultimately, in early September
2 of this year. UTU, as some of you may know, have
3 what are called craft autonomy rules, under which
4 each of their six respective crafts have to
5 approve the deal in order for the deal to be
6 ratified. All six did. And on an overall voting
7 basis, some 60 percent of the membership ratified
8 the deal, or approved the deal, I should say. So,
9 a solid, a solid, favorable vote by the rank and
10 file. Now, this agreement was a result of very
11 intense and difficult bargaining. At least a dozen
12 or more negotiation sessions and numerous informal
13 meetings and discussions. I should state that this
14 was all in direct negotiation. Mediation was not
15 invoked by either side, so the parties took this
16 on themselves. At the end stages, however, we
17 jointly invited participation on a facilitation
18 basis by board members of the National Mediation
19 Board and they were most helpful in assisting the
20 parties to the end point of a successful,
21 tentative settlement. Now, I note at the outset of
22 this hearing and in some of the rewritten
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Page 65 1 materials submitted to this board by the
2 organization's commentary about internal divisions
3 and uncertainty growing out of the Smart merger,
4 and the implication, I think, is perhaps even more
5 plain in the remarks today, that the UTU agreement
6 somehow is tainted. It's not the product of real
7 bargaining that the UTU leadership and their
8 bargaining committee's motives and strategy were
9 somehow affected by the discord and the turmoil
10 around the merger. And I suppose the suggestion is
11 that that is a reason to discount, to disregard
12 the UTU settlement. To say the least, inviting
13 such speculation on your part treads on very, very
14 dangerous ground. But I will say this, from my
15 vantage point, as the Railroad's Chief Negotiator
16 throughout those negotiations, from the beginning
17 to the end, President Futhey and the rest of his
18 committee were determined and focused on getting
19 the best possible deal they could. The settlement
20 they crafted was, as I said, ratified by all six
21 crafts and by a solid majority of the rank and
22 file. As we will show, by any objective measure,
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Page 66 1 the terms of that deal are demonstrably fair and
2 reasonable. So, whatever else one may say about
3 the UTU deal, certainly a suggestion that somehow,
4 someway, it is the product of less than arms'
5 length bargaining is just not so. Certainly not
6 from my vantage point. Earlier on in our
7 discussions with the UTU bargainers, we agreed on
8 an overall approach to negotiations and we would
9 focus on three things: a reasonable wage package,
10 limiting (inaudible) compensation issues on both
11 sides to make it more amenable to finding a
12 pathway to an agreement that would work for both
13 sides, and developing strategies to curb growth
14 and healthcare costs. Now, I want to focus
15 particular attention on that last subject. There
16 is a continued and unsustainable escalation of
17 healthcare costs in this country. It's a national
18 crisis, and that crisis has drawn enormous
19 attention from the President, the Congress, expert
20 commentators, and it ultimately spawned
21 comprehensive healthcare reform legislation. In
22 our experience and the railroad industry sharply
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Page 67 1 illustrates the problem of incessant growth and
2 costs. By 2015, for example, absolute change, or
3 reform, healthcare costs for employee will have
4 tripled since 1999. Obviously, simply
5 unsustainable. There's a broad consensus that a
6 substantial part of the problem at the root of
7 this ever-escalating cost is over-utilization of
8 healthcare services. Wasteful spending on unneeded
9 care. And in that regard, planned design plays a
10 critical role. And unfortunately, we had a big
11 problem in that area. The planned design of our
12 in-network portion, what's called the MMCP Plan,
13 Managed Medical Care Plan, which accounts for the
14 vast bulk of all medical expenditures, some 90
15 percent, is considerably more generous than, and
16 substantially out of line with prevalent planned
17 design. We have, it was termed.first dollar
18 coverage at 100 percent. That is, other than
19 copays, the plan covers all expenditures. It
20 produces a benefit adequacy of 97 percent. That
21 is, the allocation of costs between plan and
22 users, 97 percent of expenditures are covered by
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Page 68 1 the plan. Because little or no payment by our
2 members is required at the point of service, and
3 by that I mean if you go to a doctor, we have a
4 copay. Other than that copay, everything else is
5 covered, 100 percent, under the current plan
6 designed. We were experiencing very costly and
7 unnecessary utilization of services without, we
8 found, co(inaudible) (inaudible)ing improvements
9 to overall health. We had a similar problem in our
10 drug plan design. Our plan lacked virtually any
11 standard management programs to promote safe and
12 effective utilization, and we had a copayment
13 structure that did not optimize cost effective
14 choices. We made those points to the UTU, as well
15 as to the other unions in this round. UTU said,
16 "Okay, let's take a look at that. Let's
17 objectively sit down, evaluate the problems, see
18 if they really exist, to what extent, and are
19 there areas of change or improvement that we can
20 agree or justify, and see if we can't fashion a
21 solution across the table." To do that, we agreed
22 to engage expert consultants on both sides, to
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Page 69 1 work together, and their task was to develop
2 recommendations for consideration by the
3 bargainers. Given the complexity and the
4 difficulty of these issues, it was clear that to
5 make real progress, the bargainers needed help and
6 guidance from experts in the field. Those
7 consultants were instructed to come up with a
8 revised design that would encourage prudent
9 choices, make more effective use of available
10 dollars, but without compromising overall
11 healthcare outcomes. All of which would help
12 contain growth in our costs. They were also
13 instructed to search for win-win solutions
14 wherever possible. Changes that would be
15 beneficial, both from a cost standpoint and from
16 an individual member standpoint. They were also
17 asked to investigate and to seek a fair allocation
18 of costs and benefits among employees. Simply
19 stated, to pursue the principle of "those who
20 utilize services should pay for them." But with
21 reasonable limits to protect against excessive
22 financial burdens on any individual or any family.
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Page 70 1 Now that concept to us seems unremarkable. Point
2 of service cost sharing is widespread if not
3 universal. You will hear much more on that point
4 from our experts, but it is a fundamental point of
5 contention and a difference between the parties,
6 philosophically as to how to address this issue.
7 We also agreed that in connection with this
8 investigation and evaluation of changes, that
9 would be beneficial insofar as cost containment
10 encouragement of more prudent choices, to consider
11 sharing some of the value of those plan design
12 changes with employees by limiting increases in
13 direct cost sharing. A little later, I will
14 describe in more detail the changes that we agreed
15 to. But in the end, I want to emphasize this
16 point. These design changes do not reduce the cost
17 of healthcare to the railroads. What they will do,
18 we hope, is to contain growth in costs, an
19 absolutely essential outcome if we are going to
20 get a handle on the problem of runaway, incessant
21 escalation of healthcare costs. Now, in contrast
22 to the UTU bargaining, the next slide, please.
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Page 71 1 We've got little traction with the other
2 organizations, certainly in the case of healthcare
3 change. As you'll see up on the screen, a sampling
4 of commentary from the.Mr. Scardelletti, which is
5 typical of the reaction that we got with respect
6 to our proposals for healthcare change. TCU said,
7 the TCU group was certainly very open in its
8 opposition, but they were not alone. Both sides
9 were resistant. Not surprisingly, it was difficult
10 to make very much progress across the. In the case
11 of the CRU group, we had a total of three direct
12 negotiations, meetings in 2010, first year of the
13 new round. Mediation.before mediation was invoked,
14 which they did in July of '10, after mediation was
15 invoked, the parties met three times with the
16 mediator present. At that point, the TCU declared
17 that their belief that we were at impasse and
18 demanded a release. Mind you, this is all in the
19 very first year of bargaining, three direct
20 negotiation meetings, three mediation sessions. We
21 met soon after that request was made to the
22 Mediation Board in January of 2011, and the TCU,
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Page 72 1 after that meeting, again, declared impasse and
2 demanded a release. I'll speak to this a little
3 more later, but essentially, from that point to
4 this point, the record is very plain. The CLU
5 Unions abandoned real bargaining very early on in
6 the process. They were unwilling to entertain any
7 change, in the benefit arena. They were adamant
8 with respect to their own demands, and it seems
9 clear to us, at least, that their hope and
10 certainly their proposal is to evade any
11 engagement on healthcare issues in this realm.
12 Obviously, we think that record was not, should
13 not lead to a two-way reward for intransigence.
14 Now, the OLBC bargaining was more active, but it,
15 too, lacked true constructive engagement. First
16 year of bargaining, we were in direct
17 negotiations. We met some 10 times in 2010, and
18 mediation was requested in early '11, and we had,
19 I believe, seven mediation sessions with them, to
20 no avail. Now, about from RLBC's refusal to engage
21 in what I would term meaningful negotiations on
22 the railroad's healthcare proposals, there was
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Page 73 1 conversation and discussion and even exchange of
2 an idea or two in the healthcare arena, but far,
3 far from any real engagement on the issues that we
4 believed were necessary to address. We had an
5 additional obstacle. RLBC had a large set of work
6 rules and compensation demands, including major
7 changes in longstanding rules. But we were
8 unwilling, at the table, to engage or entertain
9 trade-offs in any form. And they did so, despite
10 our readiness to refrain on our own work world
11 changes. Like we proposed to the UTU, we thought
12 in order to facilitate movement, constructive
13 movement toward a deal, it was necessary for the
14 parties to trim their lists. We were wiling to do
15 that and said so. We wanted to hone in and focus
16 on the key issues. We did not get from the RLBC a
17 similar willingness to whittle down their list.
18 Now, before you, you see a number of issues that
19 have been advanced to you in this proceeding. Now,
20 while the demands and the proposals that I've
21 mentioned remained on the table in the RLBC
22 negotiation throughout, and indeed, are advanced
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Page 74 1 here. We really did not spend much time at all on
2 many of them, as you will see in the chart before
3 you. For quite a few years, no real engagement at
4 all. Little more than a recitation of the demand
5 and some cursory conversation about it. Putting
6 aside the merits, for the moment, of these issues,
7 we think it's especially inappropriate for these
8 unions to come before you asking for significant
9 rule change in areas that the parties have barely
10 discussed in bargaining. We think it's improper,
11 inappropriate, and should be rejected. It's also
12 important to note that one of the organizations in
13 the RLBC grouping, the BLET, has already settled
14 on wages and rules with the NSF, with Northland
15 Southern, and with CSXT, and they're in local
16 handling, as we speak, with Union Pacific on wages
17 and rules. So, to the extent that the BLET has
18 demands before you on anything other than
19 healthcare, those demands are perforce limited
20 to.in the case of the Class I's, KCS and Soo Line,
21 they're barred by moratorium on everything else,
22 in the wage and work rule area. I should note in
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Page 75 1 passing that, in the case of the roads that I just
2 mentioned, that have already settled, their
3 agreements with BLET, everyone of them has an
4 incentive based pay arrangement in effect. The
5 coalitions have a great deal to say about the
6 financial and economic position of the industry
7 and you heard again, this morning, in the opening
8 remarks of counsel, the same drumbeat. They assert
9 the we are stronger and more vital than any time
10 in our history. There's no end in sight to
11 continued growth and prosperity. But they had no
12 interest, showing no interest at the national
13 table in incentive pay, profit sharing and the
14 like of those sorts of arrangements that would
15 give them an opportunity to share in that
16 prosperity. Their demand is strictly focused on
17 guaranteed wage increases. So, despite their own
18 predictions, they're completely unwilling to share
19 any downside risk. Should profits lag or economic
20 conditions change, it's a one-way street. Let me
21 talk now about our bargaining history with these
22 organizations following the UTU agreement. Our
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Page 76 1 frustration, at any constructive engagement with
2 these organizations, only worsens after the terms
3 of the UTU agreement were released. When we met
4 with the groups, we made it clear that we thought
5 the UTU deal set parameters, a framework for
6 negotiation. We did not say to them it had to
7 follow in lockstep with every term and condition
8 of the UTU agreement. But we did say that the
9 value proposition had to be the same. Both
10 coalitions immediately rejected that notion as any
11 basis for bargaining, and instead, they turned
12 their attention and their energies to attacking
13 the UTU agreement and the UTU leadership in a.what
14 I would consider unprecedented, lobbying campaign
15 against ratification. Slides that have just been
16 shown are telling you just that, or are giving you
17 just a sampling of some other rhetoric, some other
18 commentary. It went so far as to even sending
19 individuals to UTU ratification meetings in an
20 effort to persuade rank and file to reject the
21 agreement. (inaudible) mentioned this in his
22 opening remarks and it seems paradoxical, to say
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Page 77 1 the least, if it is true, as the unions will
2 assert and have asserted, that the UTU agreement
3 is irrelevant. It should be given no right,
4 merits, no consideration. Why go through all of
5 this effort? Why the shrill rhetoric? Why all of
6 the energy directed here? And we think the answer
7 is obvious. They know full well that a ratified
8 UTU deal is significant and it would set a
9 pattern. It's the last thing they wanted to see.
10 So, in sum, bargaining stalled with both CRU and
11 RLBC and even regressed throughout the spring and
12 summer of 2011. Coalitions refused to even
13 consider conversations within the framework of the
14 UTU deal. They continued to reject any plan design
15 changes. They refused to modify their own wage
16 demands, which were well in excess of UTU deal.
17 And in the case of the RLBC, continued to press
18 their demands for substantial additional
19 compensation and benefits. Again, they abandoned
20 any pretense at that point, of constructive
21 engagement and were clearly positioning themselves
22 to take the dispute to you, to PEB. So, with that
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Page 78 1 history, let's turn to a closer look at the UTU
2 agreement, on which our proposal before you is
3 founded. Start with wages. As you can see, we have
4 a package of wages detailed to its beginning in
5 each case, effective on July 1st, running through
6 January 1, of 2015, 17 percent compounded, 18.24
7 percent. Now, next slide, please.
8 MR. GRADIA: I want to emphasize a particular
9 feature of the, of the Agreement. We talk of six
10 years of wage increases. The moratorium provision
11 that we propose would allow for reopeners to
12 commence 1/1/15. So the moratorium would run for
13 five years. However, we agreed with UTU that we
14 would provide an increase in January 1, of 2015,
15 the sixth year, subject to a side letter and that
16 side letter which is on the screen before you,
17 essentially provides that if the parties
18 bargaining dispute in the new round is referred to
19 third parties either arbitration, APEB or the
20 like, that the parties are in agreement that the 3
21 percent increase January 1, '15 would be a
22 complete resolution of the compensation adjustment
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Page 79 1 issue for that calendar year. So to clarify, wages
2 six years, we've got a moratorium that runs
3 through the end of '14. If the organizations are
4 not interested in the increase in 2015 pursuant to
5 this arrangement, we are certainly willing to
6 agree to the increases as provided 10 through 14.
7 Next slide please. Now the next several slides
8 will address the two pieces of additional
9 compensation that are contained in the UTU
10 Agreement. First, is extra compensation related to
11 entry rates. For many rounds, the UTU's, one of
12 the UTU's principle objectives has been to
13 eliminate or substantially modify entry rates. And
14 we have persistently and successfully resisted
15 that in National bargaining primarily because of
16 the sheer cost of the, of the change. In this
17 round, the UTU renewed its demands for elimination
18 of substantial modification of entry rates. Now
19 matter of background, the, what I would call the
20 National entry rate provisions that are applicable
21 to UTU are five year entry rate progression
22 starting at 75 percent and progressing in 5
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Page 80 1 percent increments and so full pay five years
2 later at 100 percent. There are more favorable
3 local entry rate arrangements that have been
4 negotiated on their routes more favorable to the
5 employees. And combined as we went into the
6 bargaining uh, there is some a little under 10,000
7 UTU employees on some form of entry rates. In the
8 course of the bargaining, we found the solution
9 that would work for both of us on entry rates.
10 Their desire for substantive change, our desire to
11 manage the change in a responsible, reasonable
12 way. And here is the compromise, what we agreed to
13 do was to give current employees who are or have
14 recently been on entry rates, a partial refund of
15 the savings that carriers realize from entry
16 rates. We also agreed to reduce the existing
17 National service scale from five years to four
18 years for new employees with the right of the UTU
19 to preserve more favorable rules that were in
20 place. The result is on the screen insofar as the
21 outcome of our negotiation. We agreed to a one
22 time set of bonuses, lump sum payments. At the
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Page 81 1 highest tier, it is $3,000. $3,000 will be payable
2 to employees who qualify, who are subject to the
3 National or five year service scale rate. As you
4 can see those are the numbers, the amount and the
5 approximate number of individuals who we believe
6 will receive that payment. Second tier were the
7 individuals who are subject to non-National rules.
8 That included, for example, employees on BNSF
9 portions of Union Pacific. For those individuals,
10 they would get a lesser payment because they were
11 subject to less onerous entry rate rules. They
12 would get a $1,200 payment. You see the numbers
13 there. The remainder of the employees, UTU
14 population, gets nothing and you see the numbers
15 there. When you do the math uh, you come up with
16 an average of roughly $711 per individual craft
17 wide as a result of this provision. The second
18 piece of additional compensation agreed to in the
19 UTU Agreement is certification pay. Certification
20 pay for the UTU comes out of recent legislation
21 mandating issuance of rules by the Federal
22 Railroad Administration requiring conductors like
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Page 82 1 engineers that, who have, who are already subject
2 to certification requirements and have been for a
3 decade or more to be certified. Certification
4 under the regulatory scheme essentially means that
5 among other things affected employees are at-risk
6 of being unable to work in their craft if they
7 lose their certification. The UTU sought
8 additional compensation for that risk and for what
9 they believe to be additional responsibilities
10 attended to individuals covered by the
11 certification rules. We ultimately agreed to
12 resolve that demand by providing $5.00, a flat
13 $5.00, per qualifying start to individuals working
14 on posi-, working on a start that requires
15 certification, not all starts will require
16 certification. Those rules are still uh, are not
17 yet finalized and so the details are yet to be
18 determined. But they certainly will be clear that
19 there will be jobs that require certification and
20 others that do not. But the pay, the $5.00
21 allowance will apply only to a start that requires
22 certification. Now that $5.00 is the same payment
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Page 83 1 that was, that came out of a National arbitration,
2 an interest arbitration involving the locomotive
3 engineers that was in 1997. Now this payment, this
4 new form of compensation, certification allowance,
5 will not take effect until the later of July 1,
6 2012 or the effective date of the FRA rules. We
7 estimate that this certification allowance will
8 impose an additional labor cost of some 21.2
9 million dollars. That figure is based on our
10 estimation of annual starts among eligible
11 employees so approximately 4 million, 4.2 million.
12 Now using an estimated population of about 30,000
13 employees on the covered properties before you if
14 you do the math that amounts to about $708 per
15 individual, about average individual, or an
16 individual in the entire population. Now the
17 organizations talk about many unique elements of
18 value in the UTU Agreement and I am sure you will
19 hear more about that. But the fact is there are no
20 other elements of value in the UTU Agreement other
21 than these two plus wages. Additionally, as I will
22 show you later, every element of value in the UTU
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Page 84 1 Agreement is accounted for in our proposal before
2 you. Next slide. The final element of the UTU
3 Pattern Agreement is work rules. As I have said at
4 the outset, the UTU Agreement is essentially
5 compensation; GWIs plus the two other compensation
6 elements I just covered and healthcare. The only
7 item that might conceivably be termed a work rule
8 in the UTU Agreement is a technical change in how
9 we measure and apply probationary periods. That's
10 it. Other areas that the parties discussed
11 extensively but were unable to resolve at the
12 table were referred to local handling on a
13 voluntary basis for quid pro quo bargaining on
14 such terms as the parties may mutually agree. It
15 is not Section 6 bargaining. It is local
16 discussions. If they lead to value for value
17 exchange so that so much the better but that is
18 the forum to which these issues have been
19 referred. As you see those are the areas that we
20 had talked about extensively with UTU but were
21 unable to resolve and we thought the best
22 disposition, the fairest disposition, would be to
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Page 85 1 refer them back to the properties. So the upshot
2 is this, there are no rough rule provisions of any
3 substance in the UTU Agreement. That brings me to
4 healthcare, plan design changes which certainly
5 from our perspective were the linchpin to the
6 deal. Now these changes are focused on the MMCP in
7 network portion of the plan and on pharmacy
8 benefits. I talked at the outset of our plan being
9 a first downer coverage plan lacking many common
10 plan design features found almost everywhere else
11 in the world certainly in the, in the private
12 sector. The UTU Agreement includes two design
13 changes of that type that we will show or will be
14 found in virtually every medical plan design; co-
15 insurance and annual deductibles. Let me start
16 with the deductibles. Current plan design in
17 network there are none. The UTU Agreement provides
18 for what we will show to be unusually modest
19 annual deductibles $200 per individual, $400 per
20 family. Co-insurance currently none, carriers pay
21 all other than as I said the co-payments now
22 provided in the current plan design. Tier 2, we
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Page 86 1 have a very, very modest indeed generous provision
2 compared to most plans. We provide a 5 percent co-
3 insurance and, as I mentioned, there were, we had
4 in mind the necessity to address the concerns that
5 UTU have expressed about controlling or managing
6 in worst case scenarios the placement of some sort
7 of reasonable limits on exposure on an overall
8 basis of individuals and families. And as you can
9 see, the co-insurance of 5 percent caps out at
10 out-of-pocket maximum of $1,000 on an individual
11 basis, $2,000 on a family basis. Now for larger
12 families in particular and our plan covers more
13 dependents than most and our experts will explain
14 that phenomenon as well. The $2,000 maximum is
15 especially generous. Now I mentioned earlier the
16 admonition to the experts from the bargainers that
17 they were to search for win-win solutions wherever
18 possible. Let me highlight three of those that
19 came out of the UTU Agreement. Would you go back
20 to the previous slide? The first one uh, previous
21 one, the first one I want to call your attention
22 to is at the bottom of the slide the other co-
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Page 87 1 payments. Note in the emergency room urgent care
2 center, convenient care clinic, current plan
3 design proposed plan design, in our discussions
4 with UTU and with the experts, we focused a great
5 deal of attention on the problem we were having
6 with overuse of emergency room facilities uh; very
7 expensive to use uh, and way out of line with what
8 our experts were telling us were typical
9 experiences. So we needed to come up with a
10 solution to address how do we manage that problem?
11 How do we encourage the appropriate, more
12 appropriate cost effective use of emergency rooms?
13 And the answer that we got was, "Why don't we look
14 at tiering the available options for care outside
15 of normal doctor hours?" This is what we came up
16 with. UTU said to us, "Well, can't we create a, a
17 structure under which we will encourage good
18 choices? Good choices from the standpoint of the
19 plan but good choices too from the standpoint of
20 the individuals from their own exposure, their own
21 cost exposure." And this is what we came up with.
22 "Convenient care clinics," we said, "ought to be
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Page 88 1 at the lowest tier whether it is a CVS or
2 Walgreens or that sort of care can handle an awful
3 lot of routine sorts of medical interventions that
4 may come up on a weekend or at night when your
5 regular doctor is not available. Drop the co-pay
6 for that to encourage use as we did there $10."
7 Urgent care next tier up, we said, "Why don't we
8 create further incentive to utilize urgent care
9 relative to emergency room?" The answer was,
10 "Okay, let's drop the co-pay there and then let's
11 enlarge the co-pay on emergency rooms." Obviously,
12 this creates and encourages steerage, steerage in
13 the right direction; steerage that ultimately
14 will, will give the employees, their families, the
15 care that they need but at a more, in a more cost-
16 effective way. Next slide. Two other examples of
17 win-win; the if you look in the chart insofar as
18 current plan design and proposed plan design take
19 a look at the generic co-pays. In each case, our
20 Agreement provides for dropping in the case of
21 mail order substantially reducing the co-payment
22 to encourage use, greater use of generic drugs;
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Page 89 1 again, a win-win solution. Third item not on the
2 chart but I will mention is we made provision on a
3 voluntary basis for additional counseling and
4 resource services to employees and their families
5 without co-payment or co-insurance to assist them
6 in the difficult choices in care management and
7 receipt of care. The next item I want to mention
8 is what did we do with respect to allocation of
9 cost and fairness of costs. I mentioned to you
10 that one of the things that we were going to look
11 at was a means of sharing the savings of, and
12 savings I use advisedly because it is really
13 avoided costs attendant to these design changes.
14 And what we looked at was what could we do with
15 employee cost sharing as a result of implementing
16 these changes. And what we found ultimately we
17 were able to do and we reached an agreement on it
18 was to place a freeze on employee cost sharing.
19 And that freeze will fix, will, will keep the cost
20 sharing at a $200 level, the level that the
21 organization has also proposed or seeks in this
22 proceeding. We will keep that in place until July
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Page 90 1 1, of 2016 uh, unless the parties when bargaining
2 reopens in the next round provide otherwise. So
3 the absolute certainly through the up until the,
4 the end of December of '15, the, I'm sorry, '15,
5 uh, we have a, a, we will have a freeze on
6 contributions at the $200 level when the, when
7 bargaining round reopens that will be, that is a
8 subject but unless the parties voluntarily agree
9 to something different it is fixed in place until
10 July 1 of '16, a long period of certainty insofar
11 as cost sharing is concerned. And our healthcare
12 team will go into this in much more, much more
13 detail uh, but uh, bottom line is this, in this,
14 certainly in this area. The coalition unions would
15 have you believe that what the UTU Agreement does
16 and what we propose here are catastrophic radical
17 changes to the benefit plan design that would
18 essentially gut it. But here are the facts.
19 Employees independence after, after these changes
20 are made will still receive medical and drug
21 benefits far better than what most Americans
22 receive. The benefit adequacy of the Plan's MMCP
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Page 91 1 in network program under the revisions will drop
2 from 97 percent to 91 percent and for the Plan as
3 a whole they use an 93 percent and 89 percent. As
4 we will show you in much detail that is a level
5 that few if any plans approach in this country.
6 Second, carrier healthcare spending will not be
7 reduced by these changes. Growth in our costs will
8 be moderated which financially is really no
9 different than a wage increase. Someone has to pay
10 for those increases under and that someone is the
11 railroads. So, in conclusion, the UTU Pattern
12 Agreement provides on a total compensation basis
13 an increase of nearly 21 percent. This is wage
14 increase, special compensation and the increasing
15 cost of benefits, certainly generous by any
16 objective measure. That brings me to the next
17 subject. Why should the UTU Agreement serve as a
18 pattern? Don's already explained the reasons that
19 past boards, commentators have identified for
20 application for pattern the need for the pattern.
21 I want to address it from a different perspective
22 and that's as a negotiator. I believe the failure
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Page 92 1 to follow a pattern, failure to recommend a
2 pattern here would be disastrous to future
3 voluntary bargaining and hence labor relations
4 stability here is why. First off, this Agreement
5 covers a single largest rail union and certainly
6 that should matter. Second, the organizations have
7 been unrelenting in their oppositioning to and
8 criticism of the deal. Giving them more than the
9 UTU will certainly validate those criticisms,
10 reward their intransigents. And it is hard to
11 imagine any more discouraging or detrimental to
12 voluntary deal making in the future. And think
13 about it from a union bargainer's perspective. Any
14 time you are faced with the opportunity to cut the
15 first deal in a multi-union, multi-employer
16 setting you know that it carries some risk. What
17 if the other unions are going to do better? What
18 if they do, do better? Your career, your future,
19 essentially are on the line. Rank and file measure
20 performance in part by what is delivered and they
21 compare. These employees all work together. They
22 certainly are acutely aware of what happens in
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Page 93 1 every bargaining setting. It is just plain human
2 nature to avoid risk. Why stick your neck out if
3 you believe that whatever you do, that will set
4 the floor for someone to do better and put you in
5 the position of having to chase after that perhaps
6 the next time if there is a next time for you as a
7 union leader. Third, reasons to reject the pattern
8 that had been raised in the past are simply not
9 applicable here. This is a voluntary deal that
10 wasn't imposed by arbitration or by Congress. It's
11 been a, it's ratified, affirmed by a solid
12 majority for the rank and file. It's perfectly
13 translatable to these other unions. There are no
14 difficulties or obstacles to a fair translation of
15 this package to the other unions as I will show
16 you in a moment. And this should be contrasted to
17 many of the other boards that have expressed
18 reservations or qualms about pattern application.
19 Whether it was concerns about a special pay
20 element such as went through over miles or an
21 increase in over miles meaning when you are
22 dealing with non-operating crafts. There is no
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Page 94 1 credible argument as we will show that real wages
2 have failed to keep pace with inflation or that
3 any of these crafts have fallen behind their peers
4 which are factors that have also been looked at
5 and cited as a reason to depart from a pattern. In
6 fact, as we will show recent wage increases if
7 anything have substantially exceeded inflation.
8 And finally, there are no special compelling
9 circumstances here. Coalitions cite profits as a
10 reason to exceed the pattern and that's no more
11 unique to them than it was and is to UTU. UTU
12 cited the same sort of evidence; the same
13 considerations in our bargaining. That was
14 factored into and considered by the bargainers.
15 Nor is there anything unique about these
16 organizations that would justify a different
17 outcome on healthcare. And there are many reasons
18 as we will explain to maintain continued
19 uniformity of benefits for all Agreement
20 employees. And finally, they talk about their own
21 special interests but again UTU had special
22 interests. We accommodated those special
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Page 95 1 interests. We are prepared to give the same fair
2 equivalent value to these organizations for their
3 own special interests. Bottom line is this is a
4 fair deal. It is a reasonable deal. Let me explain
5 how in our view it should be applied to the
6 coalitions. I am going to start with the
7 fundamental point that I would call the value
8 proposition. Now our offer is going to reflect
9 value for every element of the pattern Agreement.
10 As I said at the outset, we are and have been
11 willing to move pieces around to accommodate
12 particular interests or goals of the
13 organizations. But the outcome has to stay within
14 the parameters of the same value proposition as a
15 total package. For example, it certainly would be
16 unfair contrary to pattern considerations to allow
17 the unions to get as they are seeking a package of
18 special compensation elements that exceed what we
19 gave to the UTU in the case of entry rate, lump
20 sums and certificate pay but also get UTU wages
21 per more. There has to be an overall equivalence
22 to maintain fairness. So let's go through how we
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Page 96 1 would provide that fair value to the coalitions.
2 Up on the screen first are the wages and those are
3 easy; so one for one equivalence. You take, you
4 read across we are offering the exact same
5 increases to the coalition unions as the UTU got.
6 Now we are also rowing (ph) as I said if the
7 organizations are insistent on having a wage deal
8 that runs 2010 through 2014 to provide the
9 identical UTU wage increases for those periods as
10 well. If we move into the sixth year, as I said,
11 we are willing to provide that same 3 percent
12 increase but subject to the same understanding
13 that we reached with UTU. Now, entry rates, this
14 one is also easy. We will give the organizations
15 the exact same terms in entry rates that we agreed
16 to with UTU. Now, is that less than what UTU gets
17 or the individuals would get on a per person
18 basis, (indecipherable at 0:30:28)? Yeah, of
19 course, but that's because they are fewer people
20 on entry rates in these crafts than the UTU. The
21 value proposition is simply this fewer people on
22 entry rates means we get less value from those
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Page 97 1 entry rates. UTU value is keyed to what do we
2 receive? What in value do we get from those
3 individuals being on entry rates? So it's
4 perfectly reasonable that what they would get
5 would be tailored to what we get in return. But we
6 are certainly mindful of the points that the
7 unions have advanced in this regard insofar as
8 different circumstances; different facts with
9 respect to these crafts; different entry rate
10 arrangements. So we are open to an alternative. If
11 the coalition unions do not want those same terms,
12 the identical terms that we offered to the UTU, we
13 will offer them a $300 lump sum for everyone
14 working in the craft. Now that's a little less
15 than the, than the roughly $700 per person value
16 for UTU. But again, that is because the value
17 proposition of the entry rates arrangement in the
18 case of UTU is worth much less to us than it is
19 with these crafts. In short, a true pattern would
20 be the exact same terms applied to everyone. But
21 this in our view is certainly a fair alternative.
22 That takes me to the second piece of additional
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Page 98 1 compensation and that is cert pay. A cert pay is
2 complicated by the fact that it is rooted in
3 external events; passage of legislation and
4 ultimately implementation of Federal rules that
5 will not be applicable to these crafts other than
6 as I mentioned already is in place with regard to
7 locomotive engineers. And it is justified by the
8 employment risk that only conductors will face as
9 a result of a certification regime. Thus, it would
10 be perfectly plausible for us to say that the
11 other crafts should not get an equivalent. And if
12 you look back to prior bargaining when the
13 locomotive engineers received certification pay
14 through arbitration in subsequent bargaining
15 rounds there were no arrangements agreed to
16 provide cert pay alternatives to crafts. It was
17 limited to the craft as to which the change had an
18 impact. Nevertheless, and by the way that included
19 UTU who vigorously sought certification pay in
20 various forms and guises in subsequent bargaining
21 after the National arbitration with the BLAT to no
22 avail. Nevertheless we have included something in
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Page 99 1 our offer that provides what we believe is an
2 equivalent to cert pay in exchange for settlement
3 of everything else. Now the idea comes out of the
4 our yardmasters negotiation, yardmasters being a
5 component of the UTU. The yardmasters in the
6 negotiation demanded their version, their
7 equivalent of cert pay, saying, "If the, certainly
8 if our parent organization gets this we ought to
9 get the exact same thing." What we ultimately
10 agreed to however, with the yardmasters was a
11 special wage adjustment. That special wage
12 adjustment effective June 30, 2011 was twelve and
13 a half cents per hour. That twelve and a half
14 percent, cents per hour produces the average
15 equivalent of about a half point GWI for these
16 coalitions. So what we propose is to apply that
17 across the board; that special wage adjustment
18 that the yardmasters receive that was negotiated
19 as in lieu of as an alternative to but in
20 recognition of the certification allowance paid to
21 the training of conductors, we would apply that to
22 all of the coalition's effective June 30, 2011.
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Page 100 1 Now again, is that less per person on average than
2 the UTU cert pay? Yes, it is. Are there good
3 reasons for that? We, we believe so. First,
4 special adjustment would take effect at least one
5 year or sooner than cert pay. Cert pay cannot take
6 effect any earlier than July 1, '12 it may be
7 later than that depending on the timing of the FRA
8 regulations. Second, this wage adjustment is
9 (inaudible) so it is subject to all further
10 increases through compounding. The UTU cert pay is
11 a flat $5.00. Third, and this is quite important
12 here, our offer is predicated on the notion that
13 the same plan design changes that we had with UTU
14 will be implemented as of January 1, '12. If there
15 is any delay in that timing than we will lose the
16 benefit of those changes. We will have no way to
17 recover it. Unlike wages there is no retroactive
18 capture of the benefits of plan design change. As
19 matters now stand we think it's quite doubtful,
20 however, that we will be able to implement plan
21 design changes for these organizations as of
22 January 1st, even if your recommendations are
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Page 101 1 adopted soon after the issuance of the report we
2 have to go through bargaining, put a language,
3 settlement language into Agreement form; union
4 ratification votes would have to ensue. The end
5 result is we're probably looking at some time in
6 the first quarter of 2012 at best to implement
7 these changes with respect to these organizations.
8 So let me turn then to plan design. Again, this is
9 an easy translation. On the left the UTU
10 provisions, on the right coalition unions; our
11 proposal exact same changes. Again, later in our
12 case you will be hearing the reasons behind these
13 changes and why it is critical to maintain
14 uniformity of benefits but the bottom line is what
15 UTU has we propose in identical fashion for these
16 unions before you. Now let's turn to craft
17 specific work roles and demands for additional
18 compensation. The UTU pattern as I explained note
19 what will change, referral of issues to local
20 handling. We propose the exact same disposition
21 for the coalition unions. Now we think most of
22 these issues should fall away once we settle wages
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Page 102 1 and healthcare plan design issues. That's
2 especially so giving the almost total lack of
3 bargaining over these issues. As noted in our
4 submissions, we think it would be very
5 inappropriate to recommend settlement on matters
6 that have not been subject to serious bargaining.
7 To say the least, I was surprised to see some
8 seven pages of proposals involving issues that for
9 the most part have received scant attention across
10 the table. Several of the members of this board
11 have certainly recognized in other places in
12 proceedings that matters not fully ventilated in
13 bargaining subject to intensive bargaining had no
14 place before a PED. We suggest the same should
15 obtain here. There are two exceptions. First, as
16 indicated on the screen, we are certainly open to
17 some mechanism for referral of issues to local
18 handling on a voluntary basis. And refocusing
19 attention on matters that have not received real
20 attention across the table that would seem to be
21 an especially appropriate way to address those
22 matters. Second, for the issues that we did
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Page 103 1 extensively discuss and there are, there are
2 issues of that sort. For example, away from home
3 expenses consumed a lot of time and a lot of
4 attention. We recognize that and there are others.
5 We are willing to move around the elements of
6 value that are in the UTU pattern again that are
7 within the parameters of the value proposition.
8 For example, use the special wage adjustment
9 equivalent of cert pay to address the
10 organizations goals for increases in the away from
11 home expense arena. But again the fundamental
12 point is the value proposition overall must be
13 respected. And that brings me to my final point.
14 This proposal is fair by any measure. It provides
15 real wage growth at a time when most employees
16 even union employees are getting little or nothing
17 in the way of wage increases let alone real wage
18 growth. It will keep in place one of the most
19 generous and comprehensive benefit plans in the
20 country. As our experts will show still well above
21 National norms. For these reasons we ask this
22 Board to recommend our proposal as the disposition
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Page 104 1 of the bargaining disputes between these
2 organizations and the railroads. We thank you for
3 your attention and would be most happy to
4 entertain any questions anyone might have.
5 CHAIRMAN JAFFE: Thank you Mr. Gradia. We're going
6 to take just a few moments for the Board to chat
7 as a whole and see if there is anything that we
8 wish to pose to you at this time. It's not a full
9 break for the rest of the room. It should be under
10 five minutes. Thank you. We are off record.
11 DR. KEVIN MURPHY: .that's sort of the summary
12 slide, which is the next one. So I have six sort
13 of key conclusions that I want to talk about.
14 Number one is how do we measure things? How do we
15 compare proposals? [More cleanly] (ph), how do we
16 take UTU settlement and translate that across and
17 apply it to the other unions? And the answer I
18 came up with is that total compensation is the
19 appropriate benchmark. Economics tells us that
20 total compensation is the right benchmark simply
21 because it's what matters to both sides. When you
22 think about it from the employee's point of view,
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Page 105 1 the value provided by wages, but also the value
2 provided by benefits is what the determines
3 ultimately what they get out of being employed at
4 a particular job. When you think about it from the
5 employer's point of view, the total cost per
6 employee is what matters. Whether they're paying
7 it in wages or whether they're paying it other
8 forms of compensation, total cost ultimately
9 determines their decisions regarding how many
10 people to hire, whether to expand operations,
11 profitability of investments and the like. That's
12 not to say all packages are equal. So you'll also
13 want to say, well what's that composition of that
14 total compensation? And I believe you're going to
15 hear from lots of people talking about changes in
16 healthcare proposals and the like. But at the end
17 of the day it's the total compensation that we
18 think is the best measurer of how to gauge
19 proposals and how to gauge either the produced
20 proposals against external data or gauge these
21 proposals against past outcomes. Next thing is
22 that the level of compensation has to be viewed in
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Page 106 1 a market context, in particular two dimensions and
2 I'll talk about these in detail later. One is the
3 effect of total compensation on employment, and
4 aggregate economic activity which is obviously a
5 huge concern today given the way the market
6 conditions we all face; and secondly, what's the
7 impact of wages on the ability of employers to
8 recruit and retain their workers? Again something
9 that's critical to think about when thinking about
10 setting compensation. Number three, is the role of
11 profitability and asks is profitability an
12 appropriate benchmark for setting performance? And
13 I'll get back to that when we, when we go through
14 the further analysis. Fourth one is productivity
15 and what role does productivity growth pay - I'm
16 sorry, what role does productivity growth play in
17 the setting of compensation? And in that regard,
18 the coalition is right. There's a link between
19 productivity growth and compensation but it's a
20 quite different one than the one they lay out. In
21 fact, the link between productivity growth and
22 compensation is determined in the broader
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Page 107 1 marketplace and economics helps a lot to see how
2 that works and why it works in that way. But it's
3 not something that holds any firm-by-firm basis.
4 Finally Number five, I'm going to say that they,
5 when we apply these principles we're going to see
6 that the UTU agreement best aligns with numbers 1
7 through 4. And finally number six, we're going to
8 try to quantify what the impact would be not just
9 on carriers but on consumers, the labor market
10 more generally, and overall economic activity if
11 the coalition's proposal is adopted in lieu of the
12 carriers' proposal. So that's where we're headed.
13 So total compensation. Why should we think about
14 total compensation? As I said a moment ago, the
15 best reason is it's what matters to both sides.
16 From the employer's point of view it what he has
17 to pay; he has to pay for the wages but he also
18 has to pay for benefits. On the employee's side,
19 the attractiveness of alternative jobs depends not
20 just on what you earn per hour, but what other
21 benefits you get. Beyond that it's also
22 quantitatively very important as this pie chart
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Page 108 1 makes clear, that there's about $93,000 up there
2 of total compensation, of which only about $53 is
3 in the form of wages. So if we were to not talk
4 about total compensation in talking about growth
5 in wage - growth from compensation over time, if
6 we just focused on wages, we'd be missing almost
7 half the picture. And it was clear today in our
8 earlier discussions. A big part of Mr. Brady's
9 discussion was about changes in healthcare plans
10 and changes in other aspects of benefits. And
11 indeed in the union's presentation at the
12 beginning, a significant part of the discussion
13 was all the different dimensions on which they
14 were looking for changes as well. So that's why
15 it's better to think about, okay we can talk about
16 pieces but in the end we've got to put those
17 pieces together and say what are they doing to
18 total compensation? That's going to be the key
19 element because it allows us to capture the full
20 pie and also allows us to talk about what matters
21 to the two sides in these negotiations. Okay? So
22 this is just a chart and I'm not going to read it
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Page 109 1 all. These are just some of the elements that goes
2 into making up that whole pie. So wages and
3 salaries has its components in each of the other
4 pieces. But that top left box is, remember, is a
5 small part, somewhat over half of the old world
6 picture. All right so let's go to the next one. So
7 how, now that we know how to measure compensation,
8 that is we're going to focus on total
9 compensation, how do we think about setting it?
10 That is whether the economic parameters that
11 determine whether we're setting the compensation
12 level too high or too low, and most importantly
13 what are the consequences? So let me focus first
14 on the too-low box, the red box there at the
15 bottom. What happens when compensation is too low?
16 Employees will have an inability to track
17 applicants, high turnover will exist, you have
18 long-term - you have defeat in your goals for
19 long-term recruiting and retention. So is that a
20 problem we have here today? As Dr. Topel was going
21 to talk about in his presentation, there's no
22 evidence that compensation is too low from this
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Page 110 1 perspective. In fact he's going to show you data
2 which show there were roughly 1 point, almost 1.3
3 million applicants for 7500 jobs in the railroad
4 unions. That's 170 applicants for every job. So I
5 think that's pretty convincing evidence that we're
6 not too on the too low side. Then you can say,
7 well, when are wages too high? Well, what's the
8 bad consequences of wages being too high? Well
9 number one it's going to raise costs and when you
10 raise cost that's going to reduce employment, so
11 people are going to hire fewer people. And in
12 today's job market context we know that's a big
13 deal. We're living in a world today where there's
14 high levels of unemployment. Raising wages it will
15 reduce employment. When I say reduce employment
16 doesn't mean the jobs necessarily be below what
17 they were before, but below what they would have
18 been had wages not been increased as much. It also
19 is going to reduce the output and raise prices in
20 the transportation sector, and railroad sector in
21 particular, which is going to have adverse
22 consequences on employment in other industries.
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Page 111 1 Because many industries depend on rail
2 transportation to move their goods and services.
3 It's also going to reduce investment. It's going
4 to induce employers to invest less in capital and
5 equipment and other things that expand output. And
6 to the extent they do invest, it's going to be in
7 things that further reduce employment by helping
8 them substitute away from labor. So there's a host
9 of costs. And you might say well aren't those kind
10 of abstract? Can we really measure? And the answer
11 is we can. And they turn out to be pretty big. And
12 I'll come back to that a little later. The ideal
13 spot in the green box is where you're compensating
14 people enough that they are able to look at
15 recruit and retain high quality workers but at the
16 same time avoid the adverse consequences of
17 setting compensation too high in terms of reduced
18 employment, investment and reduced levels of
19 economic activity overall. So that's kind of the
20 framework we want to think about. Want to go to
21 the next slide? So here's how the two proposals
22 differ in that regard. We're measuring things in
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Page 112 1 terms of total compensation, which was point one.
2 And we're looking at (inaudible). So we have
3 starting it today, there's about $93,000 per
4 employee on average. The carriers' proposal would
5 take total compensation up to almost $107,000 by
6 2014. The coalition's proposal, my number are
7 actually a little low because there's been some
8 revisions upward in that number, was about
9 $114.5,000 per employees. The difference between
10 those two is a little over 7 percent. So we would
11 raise the cost of labor in this industry about 7
12 percent above where it would be on the carriers'
13 proposal by 2014 if we were to adopt the union's
14 proposal. So that's the gap we're talking about.
15 And this is, I don't know if you guys like
16 economics, I happen to like it. It's - most people
17 hate it but, this is a concept we use often in
18 economics, probably our most, most central concept
19 which is the idea of the demand. And basically we
20 measure on the horizontal axis the quantity of
21 employment and on the vertical axis we measuring
22 total compensation. And a age old rule minus the
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Page 113 1 law of demand says if you make something more
2 expensive people will use less. And that's true
3 for labor, it's true for just about every
4 commodity we know of and every type of activity we
5 know of. As you raise the cost, people do less of
6 it. And so this graph simply shows that there's a
7 market level of compensation which is what people
8 can earn outside the rail industry. Now we know
9 the carriers' proposal is actually offering a
10 substantial premium above outside opportunities
11 and Dr. Evans later today will talk about - in
12 fact, that premium is a little bigger than we're
13 showing in this graph here. It's about 80 percent.
14 It's about a 80 percent premium. So for every
15 dollar people earn in outside alternatives, they
16 get about $1.80 in the railroad industry. There's
17 a substantial premium already existing in the
18 railroad industry. And that's a central fact;
19 that's gong to play a really important role.
20 Because what's going to happen when you start with
21 already having a premium of 80 percent, further
22 increases in the premium is going to generate a
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Page 114 1 reduction in overall economic activity. So as you
2 increase that premium that's going to serve to
3 actually further create problems, further reduce
4 overall economic activity. Again the effect I was
5 talking about before. Effects on people, not just
6 people in the room. There's the tendency of us to
7 think about well if I just pay another dollar in
8 wages, that's going to hurt the employer to the
9 tune of $1 and that's going to help the employee
10 to the tune of $1, it's just deciding who gets the
11 money. And the answer is that's not the case. In
12 fact when we raise compensation above the
13 competitive level, that is in this case
14 substantially above the level they can get on the
15 outside, there's an overall reduction in economic
16 activity. And that's not what we need at the
17 moment in the economy we have. Secondly, there's a
18 more direct reaction. There's a reduction in
19 employment. And if you think about the world we
20 live in today, a reduction in employment is the
21 last thing we need. We live in a world today
22 characterized by a jobs crisis. We live in a world
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Page 115 1 today - I'd like to go to, I think it's on the
2 next one, yes - all the news is about how jobs are
3 just not there. And go to the next slide, it's
4 more quantitative. And you got to hate this slide
5 because it's so noisy, but let me tell you what it
6 measures. It looks at several of past recessions,
7 and it's looking at on a vertical axis how much
8 unemployment has gone up and you can see the
9 current recession is the kind of heavier red line.
10 And unlike in most recessions where there was a
11 big increase in unemployment, which has happened
12 here again, this one held at to under, you know,
13 the biggest increase, that where we're at it
14 hasn't even started to come down substantially.
15 And that's what people talk about, the jobless
16 recovery, the jobs crisis, maybe we'd say. And
17 policies that would reduce employment in this
18 environment are going to be particularly harmful
19 to not just the employees who, if they don't get a
20 job here aren't likely to find one somewhere else
21 given the state of the economy, but also on the
22 overall economy in terms of overall activity. So
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Page 116 1 this - there's a particular caution I would
2 recommend against erring in the direction of too
3 high of compensation in this particular economic
4 environment. Okay, so there's two salient economic
5 facts that come out of an analysis of markets.
6 First is one, we're starting with a situation
7 where there's roughly an 80 percent premium on
8 wages in the rail industry; and two, we're in a
9 depressed labor market. Those combinations make a
10 higher wage particularly problematic. Well, so
11 what are those impacts? I'll go through them only
12 briefly. So when you raise compensation in the
13 short term, basically you think what's going
14 happen employment's going to go down and because
15 of the labor market conditions we have, rather
16 than just finding a job elsewhere that pays 80
17 percent, pays, you know, doesn't have the 80
18 percent premium, in many cases today we're talking
19 about employment moving to unemployment because
20 there just isn't the jobs to be found in this
21 marketplace. Secondly you're raising costs which
22 is going to raise the price of rail
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Page 117 1 transportation. A higher price for rail
2 transportation is going to reduce activity in
3 other parts of the economy because there are many
4 industries that are dependent on rail
5 transportation as part of their imports they need
6 for moving goods and services around - moving
7 goods around the country. If we move to the long-
8 term impact, what the impact of setting
9 compensation above market? Well, number one,
10 there's going to be less investment. By making
11 investment less profitable, there's going to be
12 less investment in expanding outward. Investment
13 is a key for job growth. It's the major engine
14 that creates more demand for labor in the future.
15 Secondly, the types of investments are going to be
16 altered in the direction of things that substitute
17 capital for labor. And that's not a theoretical
18 prediction, that's the reality of this industry.
19 We have seen tremendous degree of capital for
20 labor substitution in the rail industry over time
21 and later witnesses will explain that in
22 excruciating detail. So we will talk about that.
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Page 118 1 So go ahead and go to the next one. Okay, now I
2 want to talk a little bit about the alternatives
3 proposed. So, as an economist, when I say how do I
4 think about the setting of compensation? I start
5 with the notion that I worry about compensation to
6 being too low because that's going to prevent
7 recruitment and retention of a high quality
8 workforce; I worry about compensation being too
9 high because that's going to reduce employment,
10 investment and overall economic activity, and harm
11 people, not just people in the room. It's not just
12 shifting money from one person's pocket to the
13 other. Now, the coalition puts forward two main
14 arguments. One is profits. And a profit argument
15 is always a really tempting one because you say
16 well the funds are profitable. We can raise wages
17 and they can afford it. They can afford to pay
18 more. But the truth of the matter is, even when
19 they can afford it, if you raise wages, they're
20 going to reduce their hiring. It may not be that
21 you're actually going to get rid of people you
22 already have, but you're going to not hire people
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Page 119 1 you otherwise would have. So when the level of
2 profitability is high, the consequences of higher
3 wages don't change. It still changes the level of
4 employment from what it otherwise would have been.
5 It might be reduced hiring rather than reductions,
6 but in an economy like the one we have, where
7 unemployment is so high and sticky, it's staying
8 up, reducing hiring in one of the industries
9 that's doing well is not a good idea. That is, an
10 economy that is desperately needing expansion of
11 jobs and more opportunities for workers,
12 particularly blue collar workers, who've suffered
13 the most over the last 20 years. In that
14 environment, reducing the incentives to hire even
15 in the successful industries that are profitable
16 is not a good idea. Now the second argument that's
17 put forward is productivity. And they point to the
18 fact that productivity has risen dramatically. And
19 as I said earlier, there is a link between
20 productivity and compensation, but it's not the
21 one that the unions discussed. And I'll show you
22 what that economic link is. And again, I'm just
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Page 120 1 going to do a summary; you're going to get more
2 detail on, on this later from Kelly Eaken who's
3 going to talk exactly about it. But using, we
4 divided the industries into three pieces. We
5 divided them according to how fast productivity
6 was growing. We took the lowest productivity
7 growth industries, that's the lowest there down on
8 the left. We took the middle third in the middle,
9 and the fastest productivity growth industry on
10 the right, which is the highest growth industry.
11 So there's roughly a third of the industries in
12 each category. And the blue bars measure
13 productivity growth. And not surprisingly,
14 productivity growth actually has been negative in
15 the slowest growth industries, small positive in
16 the middle growth industries, and extremely fast
17 in the high growth industries. So you see the
18 three contrasts. Now, if you look at compensation
19 growth over this 20 year period, you'll notice the
20 red bars are about the same. There's not much
21 difference in compensation growth, with actually
22 the high productivity growth industries having
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Page 121 1 slightly lower productivity growth, I mean wage
2 growth, than the middle group of industries. And
3 you may say well, does that make sense? The answer
4 is it does, actually. Because there's a little
5 mark - then this gets back to the notion there's a
6 market out there. Consider somebody like barbers.
7 Today, barbers make many times what they made in
8 1900. Even if they don't really cut hair any
9 faster than they used to, their productivity in
10 cutting hair hasn't changed very much. But because
11 there's a labor market out there, in which
12 barbers, people who become barbers could've gone
13 into other industries, their wages have been
14 driven up by competition between the industries
15 for workers. Take the other extreme. Productivity
16 in the manufacture of computer chips has increased
17 several thousand times over time. Workers in that
18 industries don't make thousand times what they
19 used to. Why? Again because there's a labor market
20 out there. So what is the link between
21 productivity and wage growth? It's not at the
22 industry level. It actually turns out it's at the
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Page 122 1 aggregate level. Go to the next screen. This looks
2 at from 1964 to 2008. This is a five-year rolling
3 average - so to kind of smooth it out a little bit
4 - between compensation growth which is the red
5 line, and productivity growth which is the blue
6 line. They're a little bit off in levels but
7 that's mostly because they use different price
8 deflators. But the idea basically you can see the
9 pattern is very clear. That is compensation growth
10 and productivity growth at an economy-wide level
11 tracks very closely. So it's economy-wide
12 productivity growth that drives wages, not
13 productivity growth by industry. Now that makes
14 sense, because if productivity goes up in an
15 industry, and you just said okay I'm going to
16 raise wages to reflect that, that wouldn't
17 encourage investment in all the other activities
18 we want to see happen in that industry, or have
19 the appropriate adjustment of employees between
20 the different industry alternatives. So
21 productivity growth that's not the key. Again the
22 key is to focus on those two things, whether you
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Page 123 1 can hire and retain workers, and number two
2 whether compensation is high enough - is too high
3 and therefore is reducing employment in overall
4 outcomes. Go to the next. I talked before about
5 impacts. Now we're into measuring the impacts. We
6 get asked the question, if we compared the two
7 proposals, can we quantify the impacts that higher
8 wages under the coalition's proposal would have on
9 employment and most importantly overall economic
10 activity? And this is going to turn out to be very
11 important for what we want to talk about here
12 today. So how do we think about it? Well we think
13 about starting with the carriers' proposal, which
14 is already, which is the - see this employment
15 under the UTU proposal? Which is, that's the level
16 of employment we would have if we adopt the
17 carriers' proposal. Now it's true even in that
18 context because there's an 80 percent premium over
19 the outside alternative, that's still kind of what
20 economists call dead weight loss, but lets leave
21 that aside for the moment because that's going to
22 be there under either case. That is, the carriers
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Page 124 1 are not proposing to reduce wages; that's not what
2 they're proposing to do. In fact, if anything,
3 they're increasing the premium a little bit over
4 outside options. However, if you adopt the
5 coalition proposal, you're going to reduce
6 employment even more, which is going to increase
7 the loss and increase costs on the rest of society
8 by the area of that red trapezoid there, which is
9 estimated in these numbers about $440 million per
10 year. The answer is where does that come from,
11 where does that happen? So think about it this
12 way. What happens is this. We raise the wages of
13 the workers in the railroad industry. That way,
14 that increasing the wages that they're paid, comes
15 from somebody. It either comes from file (ph) and
16 consumers or it comes from the railroads. So all
17 of that money is paid for by somebody who has to
18 pay those wages to their employees. Now in a
19 market like this, most of that is going to get
20 passed through the consumers and consumers are
21 going to bear the brunt of that extra amount. But
22 in addition to that money that they gain, there's
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Page 125 1 a reduction in employment. And that reduction in
2 employment is shown as the shift from, see that
3 red, goes at the squiggly lines down there? Those
4 are the lost jobs. And because that generates an
5 extra cost, we say well how much is that? Well
6 studies of the railroad industry have shown us
7 that for every 1 percent we increase the wage
8 rate, or total compensation, we will see a 1
9 percent reduction in employment in the long run.
10 That, what that means is that we're going to have
11 fewer workers employed here, and they're going to,
12 in this case, either move to another industry
13 where they may produce output up to about 80
14 percent less because of the premium, or they will
15 become unemployed. And in today's world a large
16 number of those people who would've been employed
17 here under the carriers' proposal, would be
18 employed or unemployed under the UTU proposal.
19 That amounts to for every 1 percent, about 1
20 percent reduction in employment. If we compare the
21 two proposals, compare the union proposal with the
22 carriers' proposal we find a difference of about 7
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Page 126 1 percent in total compensation. So a 7 percent
2 higher total compensation by 2014, we would expect
3 the difference in employment to be about 7
4 percent, between one proposal and the other. Now
5 I'm not saying unemployment is going to be 7
6 percent lower than it is today because maybe
7 unemployment will be 10 percent higher than it is
8 today under the carriers' proposal, but then it
9 would be only 3 percent higher under the union's
10 proposal. So they may add 10 percent more jobs,
11 we'd only add 3 percent more jobs. Or maybe it
12 would be, you know, 6 percent higher under the
13 carriers' proposal and instead it would be 1
14 percent lower under the union's proposal. But the
15 gap is what we care about. And that's the impact
16 on the economy. So who pays? Who pays? The people
17 who pay are number one, the employees, I'm sorry
18 the customers who pay through higher prices; the
19 employees who would've gotten jobs in the rail
20 industry and have to take jobs in other
21 industries, or in today's world more likely be
22 unemployed. That is where those extra costs come
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Page 127 1 from. And we estimate that amounts to something
2 around the area of $440 million per year, which is
3 a substantial loss of economic efficiency. And
4 that's not just a blackboard number. That number
5 measures how much less overall economic activity
6 we would have in the economy because of a higher
7 wage rate. So it's a quantifiable, real loss
8 associated with setting compensation further above
9 the level of competing activities. The difference
10 between the coalition proposal and the carriers'
11 proposal would reduce overall economic activity by
12 that amount and probably more because this assumes
13 that everybody who loses a job here gets one
14 somewhere else. In today's labor market, it's
15 probably significantly worse. A substantial
16 fraction of those who would lose jobs in the
17 railroad industry, or would've been hired in the
18 railroad industry, would likely remain at
19 unemployment, which would make that number
20 substantially bigger. So where did we end up? In -
21 you want to go to the next one? So where do we end
22 up? We end up saying that we have a $440 million
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Page 128 1 per year loss from switching from the carriers'
2 proposal to the union's proposal? That's a real
3 loss showing up as less economic activity in the
4 economy as a whole. If you total that up and
5 assume this is a permanent change, that has a
6 present value of 6 percent interest of about 7.3
7 billion. Prices to consumers, that is prices to
8 rail traffic are about 1.4 percent higher; it's
9 about 800 million per year in terms of greater
10 burden borne by consumers; in terms of paying more
11 for the rail transportation that's imbedded in the
12 goods and services that they buy; and finally in
13 today's labor market, the burden would largely
14 fall on workers, not just workers here, but
15 workers in other industries who depend on the
16 railroad industry as part of their livelihood. So
17 less employment in the economy overall. Go to the
18 next one. So what do we want to say? What are the
19 economic lessons? And I don't claim to know about
20 everything else in the world or everything - I'm
21 here to talk about economics. And I know there's
22 more in economics than what you guys decide but
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Page 129 1 the economic lessons I would take away are total
2 compensation is the way to look at it. We don't
3 want to compare one deal to the other, item by
4 item, without asking how do they look when you
5 wrap them all up in terms of total compensation?
6 Number two, the carriers' proposal, which is
7 getting employees, and this is emphasized by Kim
8 so I didn't talk about it too much, maintains and
9 even increases the premium that coalition
10 employees gain relative to other similar workers
11 in the labor market; David Evans is going to talk
12 about that, show that that premium remains on the
13 other 80 percent. Even further increases beyond
14 the carriers' proposal do not provide any
15 benefits. The major benefit one gets from raising
16 wages further in terms of the economic outcomes,
17 is better recruitment and retention of workers, in
18 this case recruitment retention is not a problem.
19 We have large numbers, very large numbers of
20 applicants for every job. And finally, if you go
21 the extra distance, if you raise wages further,
22 then the carriers' proposal, that encloses
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Page 130 1 additional economic harm that is substantial. One
2 way to think about it is for every dollar of
3 additional compensation, there's about $1.80 of
4 total costs borne by the economy. $1 is borne by
5 the railroad and/or the customers; another 80
6 cents is borne by reduced overall economic
7 activity. So when you say okay I switched form
8 this proposal to that one, I give an extra $500
9 million, what that means is there's $500 million
10 in costs that's borne by railroads and their
11 customers, and there's another $400 million that's
12 borne by other people in the economy in terms of
13 reduced overall economic activity. And that to me
14 is the biggest thing to worry about. It's not the
15 impact on the people in this room; it's not the
16 fact that we can say one group can afford it; it's
17 the fact that whether they can afford it or not,
18 other people in the economy are going to suffer.
19 We're going to reduce employment, reduce overall
20 economic activity. And that's true whether the
21 industry is profitable, that's true whether
22 productively growth is fast or slow. When you have
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Page 131 1 a substantial premium over the outside
2 alternatives, shifting employment from this
3 industry to other industries will lead to
4 unemployment, which is what will happen if you
5 further increase the wage, will only serve to
6 reduce overall economic activity. And it's not
7 something small, it's important given the size of
8 the premium we're starting from and even more
9 important given the economy we're in today. And
10 that's what I want to say.
11 CHAIRMAN JAFFE: Thank you, Dr. Murphy. We're going
12 to take a few moments again before we stand in
13 recess for lunch to see if the panel has anything
14 it wishes to propose to you at this time, off the
15 record please. That was actually back on please.
16 Let's really quickly assess, we're unanimous;
17 we're in good shape. Thank you very much sir. The
18 standing lunch, I think we've got an hour in the
19 schedule. Is that correct? (inaudible). I believe
20 we have an hour for lunch. 1:45. Sorry, I
21 should've been in the mic. Thank you. If I could
22 ask everyone to be seated, please, we can resume
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Page 132 1 this afternoon. Okay. If everyone is ready, we'll
2 go back on the record. Thank you. At your
3 convenience, Mr. Munro. DONALD MUNRO, ESQ.: Thank
4 you, Mr. Chairman. For our next witness, the rail
5 carriers would like to call David Evans. Dr. Evans
6 is one of the world's leading economists. He is
7 the chairman of the Global Economics Group. He has
8 testified before a number of government tribunals
9 in the past, including emergency boards, U.S.
10 Congress, and various state and local agencies. He
11 has written extensively on labor economics and the
12 use of statistics in employment matters. He has
13 his PhD in economics from the University of
14 Chicago.
15 CHAIRMAN JAFFE: Okay, thank you. Can I ask the
16 court reporter to please swear in Dr. Evans?
17 COURT REPORTER: Do you swear the testimony you're
18 about to give in this case will be the truth, the
19 whole truth, and nothing but the truth under
20 penalty of law?
21 DR. DAVID EVANS: I do. Good afternoon. Let me give
22 you a quick overview of what I'm going to be doing
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Page 133 1 over the next few minutes. I'm going to be
2 addressing three questions. First of all, how well
3 are the coalition employees paid compared to
4 similar workers in other industries? And I'm going
5 to be looking at the total compensation and
6 straight time wages in order to do that. Second of
7 all, how well have the coalition employees done
8 over time? I'm going to compare their wage growth
9 with similar workers and with increases in the
10 cost of living. And then third, I'm going to look
11 at how do the carrier and coalition proposals
12 compare going forward in time. And then we'll
13 examine the growth and compensation - and
14 inflation-adjusted compensation growth for both of
15 those proposals. Now, in the analysis that I'm
16 going to do in the next few minutes, I'm going to
17 be comparing carrier compensation to other workers
18 in the economy using several different government
19 data sources. Now, for data sources, I'm going to
20 be using - put various sources of compensation
21 into different buckets. So sometimes overpay -
22 overtime pays in benefits, and sometimes it's in
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Page 134 1 wages, depending upon the data source that I'm
2 looking at. And what I do is I always adjust the
3 carrier numbers in the same way as the government
4 data sources are, so I'm always doing a apples-
5 to-apples comparison. So with those preliminaries,
6 let me turn to the analysis, the total
7 compensation. So let's take a look at where the
8 coalition employees were last year, and I refer
9 you to the left-hand red bar. Total compensation
10 was roughly $93,000 per employee, and that
11 includes wages and benefits. That ranged across
12 the various unions from about $70,000 for the NFCO
13 up to about $113,000. This is the yellow bar for
14 the engineers. Now, I calculated the average
15 straight time total compen - I'm sorry, the
16 average total compensation for the coalition
17 employees. I did that by taking the total cost of
18 - of employee compensation for the coalition
19 employees in 2010 and divided that by the total
20 hours worked in 2010, and that gave me the average
21 total compensation per hour of $46.58. So the
22 question I'd rather look at now is how does that
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Page 135 1 compare to similar workers? Well, the best source
2 of data for a total compensation across industries
3 is the Bureau of Labor Statistics' Employer Cost
4 of Employee Compensation Data that reports wages
5 and benefits for broad occupations. And within the
6 ECEC as it's usually called, the best comparison
7 group are the transportation and material-moving
8 workers, and in fact that actually includes the
9 coalition employees in it. The transportation
10 workers earned total compensation per hour, but
11 averaged $26 in 2010. Now, for completeness on
12 that diagram that you see before you, I also
13 report all private sector workers, and I also
14 report just the unionized private sector. Now, I
15 just want to point out that the three bars on the
16 right-hand side there, transportation and moving,
17 full-time private industry, and unionized private
18 industry, in all those cases these data also
19 include supervisory manager employees including
20 blue-collar, so those numbers are - are actually a
21 little bit - a little bit too high as a result of
22 that, but I didn't have the data available to just
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Page 136 1 do it for blue-collar workers. So let me turn to
2 something that I'm going to have throughout this
3 presentation, which is an analysis of premium.
4 What I did is I calculated the dollar difference
5 between total compensation for the coalition
6 employees and the employees in the various
7 comparison groups, including the transportation
8 sector. So with regard to the transportation
9 sector, coalition employees earned about $21 more
10 than employees in transportation and material
11 moving, so that's the dollar premium, roughly $21,
12 in 2010. I then calculated the percent premium
13 that the coalition employees got over the
14 comparison group, so the dollar premium was
15 $20.58. To get the premium in percent terms, I
16 divided that into the comparison group, so that's
17 $20.58 divided by $26, and that gives me a percent
18 premium of 79.2 percent. Whenever I report the
19 percent premium today, it's always going to be a
20 calculation that's done in that way. So I always
21 calculate the difference between the coalition
22 employees and the comparison group and then take
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Page 137 1 that number, that dollar number, and divide it by
2 the dollar number for the comparison group, and
3 that's going to be the standard approach for the
4 percent comparisons that I do today. Okay? So
5 total compensation premium, $79.2 percent. I did
6 another comparison. I compared the total
7 compensation for the coalition employees to 66
8 industries that are reported by the Bureau of
9 Economic Analysis. Turns out that the Bureau of
10 Economic Analysis, the BEA, is one of the only
11 places that at least I've been able to find that
12 reports, by industry, total compensation for - for
13 workers, so that's the reason for using that
14 particular source here. So they had a total of 66
15 industries. It turns out that total compensation,
16 uh, for the coalition employees was higher than 54
17 of those industries, so that's a total of 82
18 percent of the industries had, uh, more
19 compensation than the coalition employees. Now, in
20 the diagram here, what I've done is I've shown a
21 few examples of those industries. So I've shown
22 some - some of the transportation-related
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Page 138 1 industries and some other heavily unionized
2 industries by - primarily metals manufacturing and
3 electrical equipment manufacturing just as - just
4 as comparisons. Now, one of the things I should
5 point out here is there were some industries where
6 the average compensation in those industries for
7 employees was actually higher than for the
8 coalition employees, but those tended to be
9 industries where there's a very high proportion of
10 highly educated workers. So examples of the
11 handful of industries that have higher
12 compensation were securities; a well-known
13 industry that has highly compensated employees,
14 also highly educated ones. And another example of
15 one of those industries was computer system
16 design; obviously another one with a number of
17 highly educated employees. Let me turn to taking a
18 look at how total compensation has changed over
19 time. So what I've done is I've taken a look at
20 how total compensation changed over the terms of,
21 basically, the last agreement. The coalition
22 employees made $17.38 more in total compensation
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Page 139 1 per hour than transportation workers back in 2006.
2 The premium increased to $20.58 in 2010, so the
3 premium increased by the difference between the
4 $20.58 and the $17.39, so there was an increase in
5 the premium of about $3. The percent premium
6 increased from 76 percent back in 2006 to 79
7 percent in 2010. So that's what I have to say at
8 this point on total compensation. What I would
9 like to do now is to turn to straight time,
10 straight time wages. Obviously a very important
11 part of total compensation is wages; it's a large
12 component. In the case of the coalition employees,
13 it amounts to about 57 percent. The other
14 important thing about wages is they drive many of
15 the other benefit components of compensation, so
16 it makes sense to look at wages separately. In
17 addition, it turns out that there are more
18 detailed data available from government sources
19 that allows me to do more detailed comparisons,
20 more refined comparisons, with regard to wages, so
21 that's the other reason for focusing on straight
22 time wages for a little bit. So let me begin by
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Page 140 1 reporting the straight time wages for the
2 coalition employees. Again, the average is
3 reported in the left-hand red bar, $26.66. Again,
4 that's in 2010, ranges from $21 per hour for the
5 NFCO up to $36.74 for the ATDA. Now, I'm going to
6 be doing some more refined comparisons in just a
7 second, but we've been talking about the ECEC data
8 and transportation records for a bit. So just to
9 give you that as a - as a starting point, I wanted
10 to share this analysis here with you. The straight
11 time wages for the transportation and material-
12 moving workers in 2010 based on the BLS ECEC data
13 were $17.34. That compares to $26.66 in 2010 for
14 the coalition employees. So let me now turn to the
15 dollar and percent premium. The dollar premium for
16 the transportation and material-moving workers,
17 using that as the comparison group, is $9.32. In
18 other words, the coalition employees had straight
19 time wage earnings that were a little bit more
20 than $9 higher than the transportation workers,
21 again, in 2010. Now, I did a much, much more
22 refined analysis using the Bureau of Census's
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Page 141 1 current population survey data, and I worked with
2 Professor Charles Fay, who's made a submission on
3 the analysis that I'm going to present here. Now,
4 you're only going to see one slide on this, but as
5 it turns out there's a massive amount of data-
6 crunching and analysis that underlies this. So
7 it's one slide, but in terms of the effort that
8 went into this, it was actually disproportionately
9 larger than one slide. So let me tell you a little
10 bit where we did here in order to come up with a
11 very refined comparison analysis. Professor Fay
12 matched each of the 62 detailed jobs under the ICC
13 categories for the coalition employees to run up
14 more than 500 census job codes. So we basically
15 took the 62 ICC job codes for the coalition
16 employees and we've mapped that to 500 very
17 detailed census job categories, so that's - that's
18 what Professor Fay did. He did that matching
19 exercise. Then what I did is I went to the CPS
20 data and I calculated the average wage rates for
21 the workers in those detailed census categories,
22 mapped them back to the 62 ICC job categories, and
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Page 142 1 as a result of that had very refined comparisons
2 where each of the ICC 62 job categories is matched
3 to a comparable set of census job categories. I
4 aggregated that up for each union and then I
5 aggregated that up to the coalition total, and I
6 did that by weighting by the number of employees
7 in each of the job categories, so the numbers you
8 see here are built up from that underlying
9 analysis. Now, when I do that, the final result -
10 and the detail for this is presented, um, in much
11 more detail in my report. The result of this is
12 that the average hourly wage for employees working
13 in similar jobs in the economy rose $18.01. These
14 are private sector workers; doesn't include self-
15 employed workers, and they're full time, so $18.01
16 for comparable full-time workers in the economy;
17 that compares to $26.66 for the coalition
18 employees in terms of straight time wages. So let
19 me now turn to the dollar and percent premium
20 comparison. So the premium - so the difference
21 between the coalition employees and the comparable
22 full-time private sector workers, but comparable
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Page 143 1 ones, is $8.65, so that's a premium of - I'm
2 sorry, that's - so I skipped a step here, so I
3 want to just take you back to this slide here, I
4 apologize. So the hourly wage premium here is the
5 difference between the $26.66 and the $18.01, so
6 that's a premium of $8.65, and in percent terms
7 that's $0.48, okay? Now, none of the comparisons
8 that I've done so far adjust for education, and
9 it's quite important to take that into
10 consideration. College-educated employees make
11 more than people without a college degree. And as
12 it turns out, most of the coalition employees do
13 not have a college degree; only about five percent
14 of them do. So what I did for this analysis,
15 again, using the current population survey data,
16 and again, using the comparable workers, using the
17 analysis that I did with Professor Fay, is I
18 compared workers in similar occupations with
19 similar educational backgrounds to the coal -
20 coalition employees. And when I did that, I found
21 that after adjusting for education, that decreases
22 the wage for similar workers in the economy to
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Page 144 1 $16.13. And as a result of that, the premium
2 increases from the $8.65 without adjusting for
3 education to $10.54 after adjusting for education.
4 The premium, straight time wage premium, increases
5 from 48 percent to a little bit more than 65
6 percent. I also took a look at how straight time
7 wages have increased over the last two contract
8 cycles. As it turns out, it's been similar to
9 private industry. So if a private industry - the
10 growth rate - I don't have the actual number on
11 there, but the growth rate for all private
12 industry is 31.2 percent, and that compares to
13 coalition employees who over the period of 2001
14 and 2010 had their straight time hourly wages
15 increase by 30.5 percent. So 31.2 percent for
16 private industry versus 30.5 percent for coalition
17 employees, so very, very close increase during
18 that period of time. And I should emphasize that
19 the private industry numbers here includes people
20 with college education and beyond, and of course
21 their wages have been growing more rapidly than
22 those without a college education. Now, I
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Page 145 1 understand that Mr. Roth, on behalf of the
2 coalition, has argued that coalition employees
3 have not kept up - have not kept up their - have
4 not kept up their increases of wages with other
5 workers. And while I realize that we'd better as
6 next week, there's such a stark difference between
7 the results that he's reporting and what I just
8 showed you, that I thought I might explain why
9 that is if that's okay. His analysis appears in
10 Charts 71 and 79 of his summary statement. And in
11 Chart 71 he reports an analysis for the BRS; these
12 are the signalmen. He compares the wages for the
13 BRS with the Employment Cost Index, and he finds
14 that between 1977 and 2010, the BRS, the signalmen
15 wages, declined by 14.1 percent. And he uses that
16 to conclude that as a result of that, the
17 coalition employees are lagging behind, in effect,
18 private industry. Now, it turns out that Mr.
19 Roth's results will depend upon using 1977 as the
20 base year. I did the same calculations using three
21 other base years. I happened to choose 1994, of
22 1999, and 2004. Because of the way he reported his
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Page 146 1 data, those are the only years that I could get
2 data from basically the chart that he produced. By
3 using those three years, I calculated the, uh -
4 the - the difference between the coalition
5 employees and the ECI, and what I find is, for
6 1994, roughly the same, so basically break - break
7 about even. If I use 1999 as the base year, I find
8 that the coalition employees are about 3.4 percent
9 ahead, and if I use 2004 as the base year, I find
10 that they're about 1.4 percent ahead. So the
11 result of their lagging behind is really dependent
12 upon using 1977 and one of those early years as
13 the base year for the calculation. So let me turn
14 now back to my own analysis. I also examined
15 coalition employees' straight time wage growth
16 over the last ten years relative to the cost of
17 living. So the purpose of this is to see how the
18 straight time wage growth has been in terms of
19 advancing the coalition employees' real wages;
20 their purchasing power, in effect. And again, I
21 looked at two contract cycles, so 2001 to 2006,
22 2006 to 2010. And to do this analysis, I took 2001
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Page 147 1 as the benchmark, so I indexed everything to a
2 hundred in 2001. Over this period of time the -
3 the coalition employees' straight time hourly
4 wages had increased by 30.5 percent by 2010, and
5 over that same time period the cost of living had
6 increased by 23.1 percent. So coalition employees'
7 straight time wages goes up by 30.5 percent over
8 that ten-year period of time, cost of living
9 measured by the CPIU goes up by 23.1 percent. If
10 you take the difference between those two numbers,
11 30.5 minus 23.1, that gives you a real growth rate
12 in wages of 7.4 percent. So 2001 to 2010, the
13 coalition employees' straight time wages, real
14 growth, was 7.4 percent. What I'd like to do now
15 is to turn to the wage proposals. What I'd like to
16 do is to begin with a summary of the carriers'
17 proposal. Now, this is a six-year proposal; it
18 goes from 2010 to 2015. Under the carriers'
19 proposal, total compensation would increase from a
20 little bit more than 93,000 - the total
21 compensation is that stack on the left-hand side -
22 to a little bit more than $112,000, which is the
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Page 148 1 stack on the right-hand side, and as you can see
2 from that diagram, the different colors show you
3 the different components of compensation. Let me
4 just report, it might be helpful, the increases in
5 some of the components of compensation. So the
6 base wages, those are the two red bars. The base
7 wages grow 18.2 percent between 2010 and 2015. One
8 of the implications of that is since base wages
9 are growing, that also tends to increase many of
10 the benefit categories. And in fact, overall
11 benefit would grow, under the carriers' proposal,
12 between 2010 and 2015, by 23.4 percent.
13 JOSHUA JAVITS: Can I just ask, do you - can you
14 point out where the materials that are - calculate
15 your - your slides are, if they are?
16 DR. DAVID EVANS: The - I think I'll have to ask
17 the question of where the slides are. Have the
18 slides been submitted?
19 JOSHUA JAVITS: Just so we can follow them. Good.
20 DONALD MUNRO, ESQ.: The - most of these slides
21 were just finalized last night. We will be - we
22 will be providing copies of all of the slides to
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Page 149 1 the board by the end of the day today.
2 JOSHUA JAVITS: All right.
3 DR. DAVID EVANS: Thank you. I wasn't aware that
4 you didn't have, uh, physical copies of the
5 slides.
6 CHAIRMAN JAFFE: Yeah, although we do have a copy
7 of your report; it's Carriers' Exhibit 6.
8 DR. DAVID EVANS: Yes, thank you. And most of this
9 information is described and backed up in the
10 report.
11 CHAIRMAN JAFFE: I understand.
12 DR. DAVID EVANS: Some of the slides were done -
13 were done last night. Let me turn to the next
14 slide, which calculates the increase in the value
15 of total compensation after adjusting for
16 inflation for the carriers' proposal. Between 2010
17 and 2015, total compensation would increase by
18 20.8 percent. Just for clarification, that 2010,
19 our figure there is the - I believe it's a two
20 percent bump-up in wages at that - at that point
21 in time retro - retroactively, so that's taken
22 into account there. So taking all that into
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Page 150 1 account, total compensation would increase under
2 the carriers' proposal by 20.8 percent. What I did
3 is in order to project inflation I relied on data
4 from the Congressional Budget Office. This is
5 their projections of CPIU; it's the real numbers
6 up until about the middle part of 2011, and then
7 it's their projections going forward. Based on
8 their projections over that time period, the cost
9 of living would have increased by 10.4 percent, so
10 we have a 20.8 percent increase in total
11 compensation minus a 10.4 percent increase in the
12 cost of living, and the difference between those
13 two is 10.4 percent. So coincidentally, you have a
14 10.4 percent for the increase in the cost of
15 living, but also a 10.4 percent increase for the
16 real - real total compensation. So again, 20.8
17 minus 10.4 gives 10.4 real growth in total
18 compensation. Now, again, this is a different
19 result than what Mr. Roth reports in his filing,
20 so maybe I should say a few words about that. He
21 finds that under the carriers' proposal the
22 coalition employees would not keep pace with
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Page 151 1 inflation. He finds again they would not keep pace
2 with inflation, and this is discussed more in
3 Chart 67 in his summary statement. Now, let me
4 explain the reasons for that. Mr. Roth assumes
5 that inflation will increase by 2.8 percent a year
6 going forward in time, and as far as I can see, he
7 doesn't really provide any support for that. It's
8 quite a bit higher than what the CBO is reporting.
9 They're reporting numbers in somewhere about the
10 1.5, 1.6 range going forward in time. It's higher
11 than - his 2.8 percent is higher than historical
12 trends over 1990 to roughly the present. It's
13 higher than the consensus forecasts among
14 economists. So I think the 2.8 percent that he's
15 using to forecast things forward is - is
16 overstated. What I've done in this diagram is I've
17 shown you how using his numbers of 2.8 percent a
18 year compares with using the CBO forecast which I
19 report in the left-hand box up there. So the CBO
20 reports - the CBO projects for 2012 that inflation
21 will be 1.5; that compares to Roth, 2.8 percent.
22 Then CBO is saying 1.3 in 2013, 1.3 in 2014, and
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Page 152 1 1.8 again in 2015. So if I compound those forward,
2 I find that the CBO is projecting an increase of
3 6.24 percent up through 2015, whereas Mr. Roth is
4 projecting an increase in inflation of 11.68
5 percent over that time period. So Mr. Roth is
6 projecting 11.68 percent increase in inflation,
7 whereas CBO is projecting inflation of 6.24
8 percent, so Mr. Roth is about double what the CBO
9 is - is projecting, and that's the main reason for
10 the difference, for his conclusion, that the
11 carriers' proposal would not allow the coalition
12 employees to keep pace with inflation. He's
13 assuming a higher rate of inflation over time. Let
14 me turn back now again to my own analysis. This
15 slide shows what happens to the premiums in
16 straight time earnings that coalition employees
17 got in 2010. For the coalition employees, I've
18 calculated how the proposal would change their
19 straight time pay. Using again the CBO forecast,
20 it would go from $26.66 to $31.53. I'm sorry, I
21 said using the CBO forecast. Under the carriers'
22 proposal, their compensation would go from $26.66
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Page 153 1 in 2010 to $31.53 in 2015. Now, I want to compare
2 that to transportation workers. Transportation
3 workers in 2010 were getting $17.34. What I've
4 done is I've used the Employment Cost Index from
5 the ECEC to forecast the increase in the
6 transportation employees' earnings between 2010
7 and 2015, and that leads to a forecast that the
8 transportation workers will see an increase in
9 their earnings from $17.34, straight time earnings
10 in 2010, to $20.02, straight time earnings in
11 2015. So the result of that is the premium that
12 the coalition employees would get under the
13 carriers' proposal will expand from $9.32 in 2010
14 to $11.51 in 2015. So in other words, the
15 carriers' proposal under these assumptions would
16 increase the premium that the coalition employees
17 are getting, would get, over other transportation
18 workers by about $2 by 2015. Let me next turn to a
19 comparison of the two proposals: The carriers'
20 proposal versus the union proposal. Now, the
21 coalition proposal, uh - the coalition proposal is
22 for five years, whereas the carriers' proposal is
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Page 154 1 for six years. So what I've done is I've compared
2 both of them just over a five-year period of time,
3 to 2014. Under the coalition proposal, total
4 compensation would increase by 23.1 percent. The
5 carrier proposal would have total compensation
6 increasing by 14.8 percent. So in terms of the
7 growth of total compensation, the coalition
8 proposal leads to a significantly higher increase
9 in total compensation over that five-year period
10 of time than does the carriers' proposal. And then
11 finally I thought it would be helpful to calculate
12 the dire consequence of that difference. So what
13 I've done is I've calculated the cost to the
14 carriers of the two alternative proposals. And
15 what you see on this side is the total annual
16 compensation costs under each of the proposals,
17 and the difference between those two bars is the
18 incremental cost. And if I add those differences
19 up over time, at the end of that period of time
20 the coalition proposal is about $2.6 billion more
21 expensive than the carriers' proposal, so about
22 $2.6 billion more expensive under the coalition
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Page 155 1 proposal than under the carriers' proposal. And
2 that is my last slide. I'm happy to take any
3 questions if anyone has any. And as I understand
4 it, the slides themselves will be - will be
5 submitted, and more details are in my report.
6 CHAIRMAN JAFFE: Thank you. Why don't you give us
7 just a few moments for us to go ahead and see if
8 we have any that we need to pose to you at this
9 time? Will you hold, please? Thank you. Two quick
10 questions. The comparable jobs, were you using the
11 same information as in the Fay report?
12 UNIDENTIFIED MALE SPEAKER: Yes I was. CHAIRMAN
13 JAFFE : That's what I thought.
14 CHAIRMAN JAFFE: Could you just go over the $2.6
15 billion on Slide 20 because I started to add them
16 up and it didn't look like it from the bars that
17 were thereso it may be my quick, on the fly
18 extrapolation. It looks like there is about $1.2
19 billion in the last year. Was that right? If it
20 adds up, that is fine. I was just eyeballing it
21 and it looked a little off.
22 UNIDENTIFIED MALE SPEAKER: I think you are
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Page 156 1 probably reading the chart as the labels probably
2 need an extra decimal on the chart. I think those
3 are actually half a billion. CHAIRMAN JAFFE: Ah!
4 (Interposing) be in line.
5 MR MURRAY: I think there is something left off
6 there. So it must be we'll provide a revised
7 slide.
8 CHAIRMAN JAFFE: I got it. The halves are missing.
9 MALE SPEAKER: The halves are missing.
10 CHAIRMAN JAFFE: Here we go. Thank you very much.
11 We all okay? So we're in good shape. Thank you
12 very much.
13 MR MURRAY: Thank you.
14 CHAIRMAN JAFFE: Are you ready to proceed or did
15 you need a few moments?
16 MR. MUNRO: I believe we are ready to proceed. Our
17 next witness is Dr. Kelly Eakin and he is our
18 expert on railroad productivityits measurement,
19 sources and distribution. Dr. Eakin is a Senior
20 Vice-President at Christensen Associates which is
21 an economics research and consulting firm in
22 Wisconsin. He is an expert in industrial
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Page 157 1 organization specializing in economic analysis of
2 regulated markets and industries. Mr. Eakin
3 received his Ph.D. in Economics from the
4 University of North Carolina and he has testified
5 before the Surface Transportation Board, among
6 others, on issues relating to the rail industry,
7 capacity and infrastructure investment.
8 CHAIRMAN JAFFE: Thank you. If I could ask the
9 reporter to please swear in Dr. Eakin.
10 COURT REPORTER: Do you swear the testimony that
11 you are about to give in this hearing is the
12 truth, the whole truth, and nothing but the truth,
13 under the penalty of law?
14 KELLY EAKIN: I do. CHAIRMAN JAFFE; Thank you.
15 KELLY EAKIN: Good afternoon. My name is Kelly
16 Eakin. I am Senior Vice President of Christensen
17 Associates. On behalf of the Carriers, my
18 colleague, Phil Schoech and I have prepared a
19 report for this proceeding. Our report addresses
20 the issues of productivity and labor compensation.
21 My purpose today is to summarize our report and to
22 answer any questions you may have. Let me begin by
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Page 158 1 stating the key findings of our report. The six
2 key findings are, one, the Unions' measure of
3 productivity, freight ton miles per man hour, is
4 an incomplete, inaccurate and misleading measure
5 of productivity. Two, there is no correlation
6 between changes in an industry's productivity and
7 employee compensation. That is, productivity is
8 not a basis for compensation. Three, factors other
9 than labor explain the railroad productivity
10 improvements. Four, consistent with a competitive
11 marketplace, the vast majority of productivity
12 improvements have gone to customers in the form of
13 lower prices for freight shipments. Five, railroad
14 productivity improvements have slowed dramatically
15 in recent years. And six, future productivity
16 gains will require substantial investment in
17 infrastructure and technology. Above-market
18 compensation increases would reduce funds for that
19 capital investment and impede future productivity
20 growth. These findings lead us to the following
21 fundamental conclusion. Productivity improvements
22 in the railroad industry are an inappropriate
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Page 159 1 basis for determining compensation of railroad
2 workers. I now turn to the concept of productivity
3 in an industry. Multifactor productivity is the
4 comprehensive measure used by the U.S. Bureau of
5 Labor Statistics to monitor productivity in the
6 major sectors of the economy and individual
7 industries. The measure captures the joint
8 influences on economic growth of technological
9 change, efficiency improvements, returns to scale,
10 and other factors. Productivity measures how
11 effectively inputs are converted into outputs.
12 That is inputs plural. Typically several
13 inputslabor, capital, materials and energy are
14 used to produce an industry's output.
15 Consequently, a meaningful measure of productivity
16 must consider the combined impact of all inputs,
17 not just labor. Multifactor productivity, also
18 called total factor productivity, is a complete
19 measure of productivity. Multifactor productivity
20 compares an index of output production to an index
21 of all input usage. If output production increases
22 relative to input usage, then productivity has
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Page 160 1 increased. We use the multifactor productivity to
2 analyze the performance of the railroad industry
3 since 1980. That is, since it was partially
4 deregulated by the Staggers Act. The red line in
5 this figure shows the railroads' productivity
6 while the blue line represents the productivity in
7 the private sector of the economy. This figure
8 shows that railroads have substantially
9 outperformed the rest of the economy. Between 1980
10 and 2009, the railroads have averaged 3.5 percent
11 productivity growth per year while the private
12 sector of the economy averaged only about one
13 percent per year. But there are really two stories
14 on railroad productivity. The first story is the
15 productivity spurt immediately following
16 deregulation. Between 1980 and 1986, the railroads
17 averaged 4.7 percent productivity growth. However,
18 the second story is the productivity slowdown.
19 Between 1996 and 2009 the railroads have achieved
20 average annual productivity improvement of 1.8
21 percent. I will return to the productivity
22 slowdown in a few moments. In contrast to
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Page 161 1 multifactor productivity, the Unions' measure of
2 output per man-hour is incomplete, inaccurate and
3 misleading. The Unions' measure is incomplete. By
4 focusing only on labor, the measure completely
5 ignores the other inputs used in production.
6 Because it is incomplete, the Unions' measure is
7 also inaccurate. In cases where the amount of
8 labor stays the same but other inputs go down, the
9 Unions' measure would indicate no change in
10 productivity. But in fact, productivity has
11 increased. Similarly, in cases where there is
12 simply substitution of some other inputs for some
13 labor, the Unions' measure would indicate an
14 increase in productivity when, in fact, there has
15 been no change in productivity. The net result of
16 the inaccuracy is that the Unions' measure of
17 output per man-hour overstates the increase in
18 railroad productivity between 1979 and 2009 by
19 more than 100 percent. Furthermore, the Unions'
20 measure is misleading. The Unions apply the
21 commonly used term, labor productivity, to their
22 measure of output per man-hour leaving the
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Page 162 1 impression that labor has contributed
2 significantly to railroad productivity
3 improvements. However, almost 50 years ago, the
4 noted economist Solomon Fabricant warned of the
5 confusion created by calling output per man-hour
6 labor productivity. He wrote that labor
7 productivity, thus defined, will occasionally be
8 read to mean that labor is wholly responsible for
9 productivity and for increases in it, which is not
10 the case. Despite Professor Fabricant's warning,
11 this is precisely the flawed argument that the
12 Unions are making by introducing their incomplete
13 and inaccurate measure of productivity. Industry
14 productivity and labor compensation are not
15 correlated. Economic principles do not establish a
16 relationship between productivity growth in an
17 industry and growth in compensation paid to
18 workers in that industry. As Dr. Murphy explained
19 earlier, compensation growth is determined by the
20 more general market and at the aggregate level,
21 and not by productivity growth that occurs in any
22 particular industry or at any particular employer.
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Page 163 1 Furthermore, increases in productivity do not
2 necessarily mean that the firm or industry has the
3 ability to pay above market wages. Competitive
4 market pressures may cause productivity gains to
5 be passed on to customers through lower prices. An
6 example familiar to us all is the computer
7 equipment market. That industry has achieved
8 tremendous productivity improvement passed through
9 to consumers in lower prices for substantially
10 increased computer power which the real
11 compensation per worker in that industry has
12 decreased. An examination of the empirical
13 evidence confirms there is no connection between
14 productivity and compensation paid in an industry.
15 What we have here is a plot of the average annual
16 growth of multifactor productivity on the
17 horizontal axis against the average annual growth
18 in real hourly total compensation on the vertical
19 axis for the 86 industries comprising the U.S.
20 manufacturing sector. This covers the period 1987
21 to 2008. Now I will note right here that this is
22 scaled a little bit differently than in the report
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Page 164 1 so that it is more pleasant to the eye here. So if
2 you are saying, "This doesn't look like what is in
3 the report," it is the same data, but the scaling
4 is different. So.each dot represents and industry.
5 These data are gathered from the U.S. Bureau of
6 Labor Statistics. Now if there were a connection
7 between industry productivity and compensation,
8 then this graph would show a cluster of points
9 along the line with a positive slope. That is,
10 industries with greater productivity would tend to
11 have greater compensation growth and those with
12 slower productivity growth would have slower
13 compgrowth in compensation. But the data are all
14 over the place. Many high productivity growth
15 industries have low compensation growth and vice-
16 versa. In fact, there is no statistical
17 correlation between industry productivity growth
18 and the compensation growth. And the correlation
19 coefficient is the small number in the bottom
20 right there and is -.031. But that is not
21 statistically different from zero, which just
22 confirms there is no connection. Now this is not a
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Page 165 1 new or a controversial finding Over 50 years ago,
2 Professor Fabricant did a similar analysis of 80
3 manufacturing industries between 1899 and 1953. He
4 arrived at the same conclusion that the relation
5 between and industry's productivity growth and
6 compensation growth, to use his words, is quite
7 minor, if not negligible. The post-Staggers
8 productivity boom was caused by many factors
9 unrelated to labor effort or skill. Specifically
10 the productivity gains have come from increased
11 traffic volumes, reduction of inefficiencies and
12 technological advances. Additionally, many
13 flexibilityadditionally, market flexibilities and
14 managerial efficiencies enabled by deregulation
15 have also allowed substantial network
16 consolidation and reduction in employment. Traffic
17 volume growth, and particularly the shift in the
18 product mix toward Western coal and intermodal
19 traffic has been central to the productivity
20 improvements. Deregulation facilitated the
21 consolidation of network and the abandonment of
22 uneconomic track. Technological improvements in
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Page 166 1 locomotives and tracks have allowed heavier,
2 longer trains to go farther distances. The average
3 train in 2009 was eight percent longer, had 60
4 percent more total weight and went 50 percent
5 farther than in 1980. Other technological changes,
6 particularly in electronic track and equipment
7 inspection, have led to operational efficiencies
8 such as the elimination of cabooses. Much of the
9 technological improvement has been embodied in new
10 capital equipment that performs functions that
11 labor used to perform. The substitution of capital
12 for labor coupled with negotiated changes in work
13 rules, allowed substantial reduction in
14 employment. All of these factors combined to
15 enable the railroads to exploit economies of
16 density. That is, the railroad productivity story
17 is about density, not about labor. Density is
18 simply the ratio of output to network size. Output
19 is revenue ton miles represented by the blue line
20 in the middle of this graph. Revenue ton miles
21 almost doubled between 1980 and 2008 but has taken
22 a steep decline in the recent economic downturn.
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Page 167 1 Network size is the miles of road shown by the red
2 line. Miles of road have steadily declined such
3 that today there is just a little more than half
4 the miles of road that there was in 1980. Density,
5 the ratio of output to network size, is given by
6 the green line. Since 1980, railroad track density
7 has tripled. By getting more traffic on a smaller
8 network, average costs have decreased markedly.
9 But the increases in density have slowed
10 considerably in recent years and that is what is
11 behind the productivity slowdown. Furthermore, we
12 find no evidence that rail labor has become more
13 skilled or otherwise intrinsically more productive
14 than has labor in the rest of the economy. In
15 fact, the evidence we have found indicates that in
16 the last decade the educational attainment of the
17 labor force in general has increased relative to
18 rail labor. Thus we conclude that it is factors
19 other than labor that explain the railroad
20 productivity improvements. As I mentioned a few
21 minutes ago, since 1996 railroad productivity has
22 slowed dramatically. Between 1980 and 1996
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Page 168 1 railroad productivity grew at a rate of 4.7
2 percent per year, almost seven times the
3 productivity growth in the broader private sector.
4 However, between 1996 and 2009, railroad
5 productivity growth slowed to 1.8 percent per year
6 and the growth in private sector productivity
7 increased to 1.2 percent. That is, since the rail
8 productivity slowdown, rail productivity growth
9 has become more comparable to the productivity
10 growth in the broader economy. This graph shows
11 the year to year changes in productivity for the
12 railroads compared to the productivity changes in
13 the private sector. Productivity growth is more
14 volatile for the railroads than for the broader
15 economy because railroads are more capital
16 intensive and more sensitive to fluctuations in
17 general economic conditions as compared to the
18 diverse industries within the private sector. This
19 figure clearly shows the extent to which railroad
20 productivity growth has declined relative to the
21 private sector since 1996. In fact, in 1997, 1998,
22 2002, 2003 and 2009, productivity growth in the
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Page 169 1 private sector outpaced that of the railroads.
2 Most of the same factors underlying the
3 productivity boom in the years immediately
4 following the Staggers Act also explain the
5 productivity slowdown. The basic explanation
6 behind the productivity slowdown is that traffic
7 density is increasing at a slower rate, employment
8 has stabilized, the rate of technological advances
9 has lessened, and opportunities for reducing
10 inefficiencies have become harder to find. This
11 bar chart shows that the key drivers of railroad
12 productivity have lower annual rates of growth
13 after 1976 than they had in the first 16 years
14 following the enactment of the Staggers Act. The
15 slowing rate of employment reduction represents
16 the largest differential between the two periods.
17 The other factors in this chart, ton miles, miles
18 of road, length of haul, and train weight all
19 contribute directly to the measure of density.
20 Taken all together, the slowdown in these factors
21 has slowed the rate of increase in traffic
22 densitythat is on the far left side of the
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Page 170 1 graphhave slowed the rate of increase in traffic
2 density from more than five percent per year to
3 less than two percent per year. In a nutshell,
4 that is the productivity slowdown story. Finally
5 the pace of technological advance seems to have
6 slowed and the opportunities for weeding out
7 inefficiencies are fewer. To summarize the
8 productivity slowdown, it appears the low hanging
9 fruit of deregulation has been harvested. This has
10 profound implications for future rail productivity
11 growth which we will discuss in a minute. But
12 before discussing future rail productivity growth
13 I would like to briefly touch upon how the
14 railroad productivity achieved thus far has been
15 distributed among the industry's stakeholders. We
16 have got a pretty good picture of the sources and
17 the extent of productivity improvements but where
18 have the rail productivity gains gone? The answer
19 is that competitive pressures have passed the vast
20 majority of productivity gains on to consumers in
21 the form of lower freight rates. Adjusted for
22 inflation, rail freight rates have decreased by
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Page 171 1 more than 40 percent since 1980. Our calculations
2 are that these price reductions to consumers
3 account for about 85 percent of those productivity
4 improvements. Now the productivity gains retained
5 by the railroads have allowed the industry to
6 regain its financial health and make necessary
7 capital improvements to foster future productivity
8 growth. This reinvestment of the railroad's shared
9 productivity is demonstrated in this figure. These
10 outcomeslower rates to consumers, a healthy
11 industry, and sufficient investment to maintain
12 rail system and promote future productivity, are
13 precisely the goals and hopes expressed by
14 President Carter when he signed the Staggers Act.
15 Now I return to the implications that the current
16 productivity slowdown has for future productivity
17 growth. The opportunities that deregulation
18 presented to reduce inefficiencies and find new
19 market flexibilities, have largely been realized.
20 Likewise, increased traffic density is
21 increasingly more difficult to achieve. It has a
22 diminishing impact. Reduction in employment has
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Page 172 1 stabilized. So what is left? What is left as the
2 primary driver of future railroad productivity is
3 technological change, much of which is embodied in
4 new capital equipment. Thus the railroads need to
5 continue to reinvest its productivity benefits in
6 order to maintain future productivity growth
7 commensurate with that in the rest of the economy.
8 Requiring the Carriers to pay above market
9 compensation to labor because of past productivity
10 would impede future productivity growth. First it
11 would decrease the Carriers' ability to self-
12 finance this capital investment. Second, it would
13 decrease the incentive to make investments as the
14 net benefit to the Carriers of any future
15 productivity would be less. Accordingly, above
16 market compensation could have serious adverse
17 consequences for continued productivity
18 improvements. I close my presentation by
19 summarizing our report. The Unions' proposed
20 measure of productivity, freight ton miles per
21 hour, is an incomplete and inaccurate measure. It
22 grossly overstates the productivity achieved.
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Page 173 1 Furthermore, it misleadingly implies that
2 productivity gains are attributable to labor. We
3 use the correct measure of multifactor
4 productivity in our analysis of the railroad
5 industry. Our investigation clearly shows that
6 factors other than labor explain the railroad
7 productivity improvements. We find no evidence
8 that increases in railroad productivity are
9 directly attributable to labor. We have also
10 examined productivityproductivity and compensation
11 across the broad set of industries comprising the
12 manufacturing sector. The empirical evidence shows
13 conclusively that no correlation exists between
14 changes in an industry's productivity and changes
15 in employee compensation. The vast majority of the
16 productivof the productivity improvements in the
17 railroad industry have gone to the consumers in
18 the form of lower rates. This is consistent with a
19 competitive marketplace, the productivity gains
20 retained by the railroads have allowed the
21 industry to regain its financial health and make
22 necessary capital investments to foster future
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Page 174 1 productivity growth. But railroad productivity
2 improvements have slowed dramatically. Rail
3 productivity growth has become more comparable to
4 the productivity growth in the broaderin the
5 broader economy. Achieving and sustaining future
6 productivity growth has become increasingly
7 difficult as economies of density are largely
8 exhausted and the low hanging fruit from
9 deregulation has been harvested. Future
10 productivity gains will require substantial
11 investment in infrastructure and technology. Above
12 market compensation increases would reduce funds
13 for capital investment and impede future
14 productivity growth. These findings lead to our
15 fundamental conclusionproductivity improvements in
16 the railroad industry are an inappropriate basis
17 for determining compensation for railroad workers.
18 That concludes my testimony.
19 CHAIRMAN JAFFE: Thank you Dr. Eakin. Off the
20 recordgo back on. I think we are in good shape.
21 Thank you very much.
22 MR. MUNRO: Thank you. Mr. Chairman, Members of the
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Page 175 1 Board, our next witness is Lance Fritz, who is the
2 Chief Operating Officer of Union Pacific. He is
3 paired with Dr. Eakin on the productivity story in
4 this sense; Dr. Eakin has laid out the case for
5 you that there is no value offered in exchange for
6 the Coalition's compensation proposal on the
7 productivity front. In other words, there is no
8 quid pro quo for the additional demands in
9 compensation that they have made before this
10 Board. Mr. Fritz will now address this from a
11 somewhat different angle andwell I think, among
12 other things, his love for railroading will come
13 through. This is an interesting story in how
14 railroads operate, if nothing else. But it will, I
15 believe, give you a sense of what Dr. Eakin is
16 talking about when he says that productivity is
17 coming from sources other than labor. Mr. Fritz.
18 CHAIRMAN JAFFE: Thank you. If I could ask the
19 reporter to please swear in Mr. Fritz.
20 COURT REPORTER: Do you swear the testimony you are
21 about to give in this case be the truth, the whole
22 truth, and nothing but the truth under the penalty
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Page 176 1 of law?
2 MR. FRITZ: I do.
3 CHAIRMAN JAFFE: Thank you.
4 MR. FRITZ: Thank you Don. Can you hear me?
5 Perfect. Which button? Perfect. As Don mentioned,
6 I am going to put a little bit of flesh on the
7 productivity story that you just heard. So let's
8 get started with a why productivity. The paramount
9 concern of operating executives in the industry is
10 to run a safe and secure operation. Embedded in
11 that is our business model. Our business model
12 starts with service and an excellent service
13 requires continuous improvement in efficiency and
14 productivity. It requires that because we compete
15 aggressively with each other for customers'
16 business. We compete aggressively with other modes
17 of transportation for that business, both of which
18 demand an ever improving cost structure. Our
19 customers demand that we help them with their cost
20 structures so that they can effectively compete
21 for business in their industry. So there is a
22 never-ending demand for productivity improvement
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Page 177 1 and efficiency improvement. We attack that in a
2 hierarchy of activities. Typically we start with
3 process improvement because it is relatively
4 straightforward to achieve and it is inexpensive.
5 We augment that with technology so that we can get
6 more out of the assets that we currently own.
7 Ultimately though, it comes down to capital and
8 capacity investment. So the business (inaudible)
9 [0:00:10] pretty simple. Service is demanded and
10 it requires efficiency and productivity
11 improvements, generates cash so that we can invest
12 in capital in order to provide better service and
13 grow. This is a great proof statement. It's a
14 slide that, by the way, uses a productivity
15 measure that's closer maybe to the coalition and
16 to our own expert witness. The key point, though,
17 is the connectivity between capital spending and
18 productivity improvement on labor input. The red
19 line on this chart is capital spending from 1980
20 to 2010 in America's freight railroads. That's
21 grown by a factor of about 3.7 times over that
22 three-decade period. The blue line is gross ton
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Page 178 1 miles per employee. That's grown by about a factor
2 of 4.4 over the same period. Now what I'm going to
3 do next is I'm going to walk you through a number
4 of examples that indicate how that capital
5 investment has generated that labor productivity
6 improvement. Nowhere in those examples are you
7 going to hear that we're asking employees to work
8 harder, to work longer hours, to work in a worse
9 environment. As a matter of fact, you'll see
10 plenty of examples where the work environment has
11 improved. So let's get started. The first example
12 I'm going to use is really specific to the T and Y
13 crafts - that's train and engine men that run the
14 trains over the railroad. This chart demonstrates
15 that during the last three decades, average tons
16 per freight train has increased about 61 percent.
17 Now that's on the backs of some significant
18 capital investment. We've invested in new cars
19 that can handle heavier loads. New locomotives
20 that can pull heavier haul. DPU technology. That's
21 the distributive power technology that enables us
22 to take the locomotives at the head end of a train
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Page 179 1 and distribute them through the train which
2 reduces the stress on couplers and drawbars.
3 There's an investment in premium components in the
4 railroad, in the cars, in the locomotives so that
5 those heavier hauls can be handled safely and in a
6 robust manner. And there's pure capacity
7 investment that's imbedded in this improvement -
8 new sidings, siding extensions, signalization,
9 multiple track. All of that ultimately generates a
10 pure productivity improvement for our train and
11 engine men. They're hauling more freight per
12 train, more revenue per train. It's perfect
13 productivity. Another great example is with our
14 track maintenance personnel. It's a real important
15 function for us on the railroad to dump rock, to
16 dump ballast rock on railroad. It's because the
17 ballast rock is what keeps the railroad secure,
18 longitudinally and latitudinally. The way
19 railroads work is rail is securely fastened to
20 ties, and the ties are imbedded in rock that keeps
21 it from moving. That's what keeps our railroad
22 secure. In the old days a long time ago, it's not
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Page 180 1 even pictured here, our track men would actually
2 jam bars into the rock around ties, manipulate the
3 rock and the tie until the tie got set down into
4 the rock. What I'm showing here is how the rock's
5 distributed. On the left-hand side is a picture of
6 a trackman walking along a ballast-dumping car and
7 he's manipulating the door on that car with a
8 pole. That's kind of the basic level of dumping
9 rock on the railroad. It's limited to walk and
10 pace, it's imprecise in exactly where the rock is
11 dumped, and it's pretty much a daylight hours
12 operation. We somewhat automated that a little bit
13 in the picture in the middle. Those are gentlemen
14 pushing push-button activated doors. So you got
15 rid of the poles, a little safer. Essentially
16 limited, though, from productivity by the same
17 limitations of the picture on the left. The
18 current state-of-the-art is shown on the right.
19 That's an automated ballast distribution train. We
20 call it a plus train. Those doors on that train
21 are manipulated by a computer. The computer's
22 hooked up to GPS. That train takes a predetermined
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Page 181 1 route on the railroad and at predetermined
2 locations the train doors, the car doors
3 automatically open and dump just the right amount
4 of ballast in just the right location. And it does
5 it 24 hours a day. It dumps it about 12 miles an
6 hour. It's about a six-fold increase in the
7 productivity of the process of dumping rock, an
8 obvious productivity improvement in our track men.
9 Another great example is the tamping. I mentioned
10 our track men quite some time ago would hand
11 manipulated the rock in order to seat the ties.
12 The railroad's invested in new technology some
13 time ago pictured on the left. That's a single-
14 head automated tamper. Those come in other
15 configurations, even get a couple of heads on
16 those. The way that machine works is it advances
17 to a tie that needs to be seated into the rock,
18 and it plunges steel fingers into the rock around
19 that tie. And the fingers vibrate. And that seats
20 the tie firmly in the rock. Every time it needs to
21 tamp it has to advance, it tamps the tie. It has
22 to advance, tamps the tie. So it's a start and
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Page 182 1 stop operation. But clearly it's of much greater
2 benefit both to the track men and the Company than
3 doing it by hand. The picture on the right is
4 current state-of-the-art. That's called a
5 continuous action tamper, a CAT tamper. This
6 particular version has three heads on it. The cool
7 part about this machine is that it continually
8 moves down the railroad as it's tamping. So the
9 tamping heads in it go through a cycle where they
10 plunge, tamp while the machine is moving, and then
11 cycle back to plunge again. The machine never
12 stops. So it's got three heads as opposed to one
13 head. It's tamps four times faster. There's many
14 benefits to that right? We get off the railroad
15 faster from the standpoint of maintaining it. The
16 other thing that's pretty cool about this machine
17 is it's got something called a stabilizer as part
18 of its technology investment. There's no slowarder
19 (ph) left behind that machine once the work is
20 done. Unlike the machine on the left, we have to
21 run a certain amount of tonnage before we can
22 bring the track up to track speed. That's a pure
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Page 183 1 productivity improvement in our track labor. I
2 mentioned premium components before. That story's
3 told pretty much with rail and ties. On this slide
4 and the upper pictures you get depiction of the
5 growth in rail over time in the industry and what
6 a premium rail looks like in cross-section today.
7 So a premium piece of rail today is 142 pounds by
8 3-foot section. It's got a head hardened through
9 the manufacturing process through a special
10 quench. It's made of high-carbon steel. It's got a
11 big six-inch base. It's a great piece of rail. It
12 generally has many fewer defects in it than
13 historically. It can last longer. It requires less
14 maintenance intervention per year of its life. And
15 it generates fewer defects and fewer exposures to
16 derailments like you can see in that chart in the
17 upper right. The tie stories are the same story.
18 Current state-of-the-art shown in the lower right.
19 That's a concrete tie. It has about two X, two
20 times the life of the tie it's replacing, and it
21 requires less maintenance per year of its life. So
22 in those pictures on the left, on the bottom,
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Page 184 1 you've got a perfect before and after. That's a
2 piece of railroad that goes right through Houston,
3 a critical area, lot of TIH/PIH shipped. Picture
4 on the left is before maintenance; old ties, old
5 rail. Picture on the right, post maintenance
6 replaced with premium components. Ultimately
7 that's a pure productivity improvement for our
8 track men. Less maintenance per year over the life
9 of the track. Probably the most impressive
10 productivity story in terms of an investment for
11 track labor is the track renewal of train, or TRT.
12 It's pictured in the lower left. So when it comes
13 time to replace rail, usually or sometimes if it's
14 also the same time to replace a fair amount of
15 ties on the same segment of railroad, we'll
16 rebuild the whole railroad. We do that
17 periodically. In the old days, not too long ago
18 really, prior to about 2005, we would use separate
19 gangs typically to do that - one gang to come in
20 and replace the ties; separate gangs to come in
21 and cut out the old rock, put in new rock;
22 separate gang to come in and replace the rail.
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Page 185 1 This track renewal train does it with one gang.
2 Nine contract employees, 164 Union Pacific
3 employees. It's the biggest gang by far on our
4 railroad. What it does is you can see on the
5 right. Cuts the amount of man days required to
6 rebuild the same segment of railroad, gets the job
7 done faster. Those bars on the right are our
8 actual data from our most recent large-scale TRT
9 project. This is between Joliet, Illinois and St.
10 Louis, Missouri. It's a rebuild of that segment of
11 railroad for what we think is going to be the
12 nation's first high-speed rail program for the
13 Obama administration's initiatives. That's a pure
14 productivity improvement for the rail gangs that
15 work on the railroad. Now there's a great story
16 also for signal men. And this is invention born
17 out of necessity. So we have a mandate in the
18 railroad called Positive Train Control. By the end
19 of 2015, we have to have this positive train
20 control system installed on our railroad. In the
21 case of Union Pacific, it needs to be installed on
22 something like two-thirds, 60 percent, two-thirds
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Page 186 1 of our railroad. As part of that installation,
2 we're finding we have to modernize our signal
3 system across a fair amount of our railroad. And
4 because we're facing a deadline, we're running
5 into crunch time in trying to get the work done to
6 modernize those signal systems. One of the things
7 we've got to do is install signal masts. That's
8 the poles that the signal system is on beside the
9 railroad track. That picture on the left is how we
10 historically have installed signal masts. You dig
11 a hole, we lay a foundation, we put a concrete
12 fixture in that foundation, cover it back up, we
13 bring some rock-two or three tons, we tamp out a
14 little rock pad, and then we install a mast base
15 in the pole on top of that fixture. Takes about 25
16 hours with a bunch of assembly required. We're in
17 the process of replacing that methodology with the
18 method on the upper right. That's a pile being, a
19 steel pile being driven into the ground. So what
20 we do is we drive a steel pile, that steel pile
21 has a template that's placed on top of it, the
22 template mates with the base of the signal mast
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Page 187 1 and we install the signal mast on top of the pile.
2 Takes about an hour, 1/25th of the time. That's
3 going to enable us to have a prayer, a decent shot
4 at hitting this mandate which is a critical aspect
5 for us in the next three years. And it's a pure
6 productivity improvement for signal people. And
7 there's two operators, or an operator inside that
8 track excavator that's on the rail and it's a
9 Union Pacific employee that's operating that piece
10 of equipment. We also use technology, investments
11 of technology to make, to help our track and car
12 men crafts focus their attention on the value-add
13 that they bring to the railroad, right? Here's two
14 great examples on the top or with the track men.
15 That vehicle on the upper left is called a track
16 evaluation car. That runs at track speed across
17 the railroad. It's got ultrasound imaging on it,
18 laser imaging on it and GPS, and at track speed it
19 looks for defects in geometry or profile. Where it
20 sees the defect it notes it. That's downloaded to
21 a gang that is behind this, a maintenance of way
22 gang, and that maintenance of way gang goes right
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Page 188 1 to the problem and fixes it. Historically, that
2 gang would have had to spend time finding the
3 problem if one existed. The vehicle on the upper
4 right, that travels a little slower on the
5 railroad. That's an ultrasonic rail flaw detector.
6 It's equipped with the ultrasonic devices that
7 look inside the rail and look for rail defects.
8 Where it finds it, it marks it. A gang follows it
9 and cuts out the defective rail and replaces it
10 with new rail, right? Another pure productivity
11 play, and the thing is it focuses our workforce on
12 the value-add as opposed to the non-value-add part
13 of their work. On the bottom left are two pictures
14 really and mostly affiliated with the shop crafts,
15 or really the car men. The lower left is an
16 ultrasonic wheel inspection facility. That's in
17 North Platte, Nebraska. It's our biggest, it's
18 Union Pacific's biggest rail yard. That's a
19 facility that doesn't exist anywhere else in the
20 world. What happens is we take our heavy haul
21 trains through that facility at about five miles
22 an hour. Every wheel on the train has an
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Page 189 1 ultrasonic device attached to it that rolls with
2 that wheel for 360 degrees. And it takes an
3 ultrasonic picture inside the wheel looking for
4 defects. When it finds one, it's marked and then
5 that's immediately removed as the train is excited
6 the facility. The installation on the lower right
7 is called a wheel profile measurement system.
8 That's a wayside detection system that's installed
9 in several locations on the railroad. Trains go by
10 there at maximum authorized speed, whatever the
11 track speed is that they're authorized to run at.
12 And that device takes a laser image of every wheel
13 on the train. That laser image is sent back,
14 downloaded to a database in Omaha. And over time
15 the wheels on that car are monitored for flange
16 thickness, for rim thickness, for rim geometry, so
17 that we can find when to replace them before they
18 fail. Okay, so in both instances you've got car
19 men being able to do the value-added work of
20 making a fix instead of looking for a fix to make.
21 Here's another great example of a productivity
22 improvement and this is by process change
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Page 190 1 predominately with a little bit of investment.
2 That spaghetti diagram in the left, that's the
3 process that we used to use to repair a wheel in a
4 coal train as it entered North Platte yard. So the
5 old process is wayside detection would tell us
6 we've got a defective wheel and it needs to be
7 replaced. We would take that car out of the train,
8 move it to a repair facility, repair it, put it in
9 a receiving yard, hump it into a bowl, take it out
10 of the bowl so that we can trim it into the spare
11 yard, and then it would wait until there's another
12 train coming in with a like car that needed to be
13 replaced. That process took about 12 days. Move
14 the car all around the yard and it wasted a lot of
15 people's time. Today what we do is we repair those
16 wheels in train. That's the photograph on the
17 right. We chain up the good trucks and the good
18 wheel sets, we use a jacking device that's common
19 in the industry, we jack the cars up in train,
20 they're unloaded, and then we pull out the
21 defective wheel set and install a new wheel set.
22 That's with the new piece of equipment that we
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Page 191 1 made an investment on. Takes about 15 minutes, the
2 car's not moving all over the yard, huge savings
3 for our customers. They don't have to invest in
4 spare cars anymore; not anywhere near to the
5 magnitude they used to and it saves us an
6 investment in spare yard in the capacity to hold
7 spares. This is a super example for our shop
8 crafts. So on locomotives today when we buy them,
9 they have health diagnostics that are on board
10 that help us find the right fix at the right time.
11 The way these diagnostic systems work are there
12 are sensors that are embedded by the manufacturers
13 of the locomotive, and they monitor things like
14 the air intake system or the fuel injectors or the
15 electrical system, and they record faults. And the
16 faults are defined by the manufacturer - anything
17 that's outside of what they would consider normal
18 operating parameter. The problem with these
19 systems is that on a normal, just like a routine
20 run for a locomotive, these systems find thousands
21 of faults. Those thousands of faults get
22 downloaded to us, the owner, but there's no way to
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Page 192 1 interpret them. The OEMs haven't given us an
2 opportunity to interpret them. So what we've done
3 is our engineers, so working actually with out
4 shop craft employees, we've designed these
5 algorithms called RXs. So we take those faults, we
6 run them through a computer program, and the
7 computer program sorts the wheat from the chaff,
8 right, and identifies only the faults that really
9 probably are something wrong and then identifies
10 what probably needs to be fixed in order to remedy
11 that. In doing that we focus our shop crafts right
12 where the problem is. That information's
13 downloaded to the shop that's going to fix the
14 locomotive before the locomotive even arrives. So
15 now our shop crafts aren't spending their time
16 trying to figure out what's broken and what isn't.
17 Even better, locomotives run through the shop
18 quicker. Even better, we fix more faults as a
19 result of being able to identify the ones that are
20 real versus not real. It's a big deal. It's a
21 great productivity enhancement. The last one I
22 want to share with you has to do with the clerical
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Page 193 1 crafts. We've automated a fair amount of clerk
2 work over time. That's no secret; everybody knows
3 that, mostly through computerization. A great
4 example is in revenue accounting. Historically, we
5 would have to have a clerk sift through contracts,
6 sift through pricing tariffs, even sift through
7 contracts between railroads to figure out what a
8 customer needed to be billed, and how that revenue
9 should be allotted between carriers that
10 participate in the move. By automating the
11 billing, what we've done is we have taken all that
12 rote work off of the clerks. As a matter of fact,
13 if the billing system can't figure out the price,
14 what is does is it limits the choices to only the
15 choices that matter in that billing decision and
16 it spits out to the clerk those choices with the
17 difference highlighted. So for instance, if you've
18 got to move and it could be priced two different
19 ways and the only difference is commodity, it
20 would spit out to the clerk, "Hey, I need you to
21 tell me which commodity this is and then I can go
22 ahead and process this way bill." So the clerk
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Page 194 1 looks up one thing, commodity. Inputs that and the
2 bill goes through automatically. It's a pure
3 productivity improvement in the clerk crafts, and
4 it makes those jobs a little easier to train when
5 it's time to replace them. So in summary, what I
6 wanted to impress upon you today is number one,
7 just exactly how railroads are using process to
8 some degree, technology maybe to a greater degree,
9 and capital to the greatest degree to generate
10 productivity improvements, specifically labor
11 productivity improvement. The second thing I
12 wanted to impress on you is that in no
13 circumstances that I know of, or that I shared
14 with you, are we asking employees to work longer
15 hours, work harder during their hours, or work in
16 an environment that's more difficult. Generally
17 speaking, these investments have made the
18 environment safer. What they've done is they've
19 focused our craft employees on the value that they
20 add, the value that they bring to the table. And
21 the last thing I want to point out is you've seen
22 a lot of charts on capital spending in the
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Page 195 1 industry. Capital spending is up. It's as big as
2 its ever been. Our shareholders are committing
3 more to capital than we ever have. And that's a
4 good news story. It's a good news story for our
5 shareholders, they're getting a return out of it;
6 it's a good news story for our customers because
7 it enables growth, we can handle their traffic,
8 and it's a good news story for our employees
9 because it's enabling us to grow. With that, I'd
10 love to entertain any questions you might have.
11 CHAIRMAN JAFFE: Thank you Mr. Fritz. Give us a few
12 moments please. We're in good shape. Thank you for
13 the education.
14 MR. FRITZ: Thank you.
15 CHAIRMAN JAFFE: I think we're over the prearranged
16 time for our afternoon break. Why don't we try and
17 keep it to about 15 or 20 minutes if we can. Take
18 your seats please so we can resume. Back on the
19 record, please.
20 DAVID MUNRO: Thank you, Mr. Chairman. We're about
21 to move into the last module of our presentation
22 for today. We've heard from Ken Grodia on the
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Page 196 1 history of this dispute. We've heard from Dr.
2 Murphy on the relationship, or lack thereof, of
3 profitability to compensation. We heard from Dr.
4 Evans on benchmarking. And we've heard from our
5 two witnesses on productivity, Dr. Eaken and Lance
6 Fritz, who is one of the few people who can
7 (inaudible) about ballasts. The last portion of
8 our presentation goes to our - the point I made in
9 the introduction, will go to the evidence within
10 the industry itself that current compensation
11 levels are more than adequate. I have two
12 witnesses on that point. The first of which is Dr.
13 Topel, who is one of Dr. Murphy's colleagues at
14 the University of Chicago. Dr. Topel is a labor
15 economist. He teaches labor markets and
16 compensation theory at the University of Chicago
17 and he is to tell us about his study of the rail
18 industry.
19 MALE SPEAKER: Thank you. If I could ask for a
20 reporter to swear in Dr. Topel.
21 REPORTER: Do you swear the testimony this
22 afternoon will be the truth, the whole truth and
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Page 197 1 nothing but the truth?
2 DR. TOPEL: I do.
3 REPORTER: Thank you.
4 CHAIRMAN JAFFE: Thank you.
5 DR. TOPEL: See if I can work this thing. It's a
6 pleasure to be here and talk to you about the
7 dispute between the carriers and the coalition.
8 What I'm going to talk about is to build on some
9 of the themes that David Evans and Kevin Murphy
10 spoke about. David Evans established that compared
11 to other people in transportation, warehousing,
12 individuals - realizing individuals in the rail
13 industry receive about an 80 percent wage premium.
14 And Dr. Murphy went to similar lengths in
15 explaining a lot of the economic implications of
16 that kind of premium. And I'm going to go a little
17 farther along the same lines of talking about
18 economic implications because the question I've
19 been asked to address is whether that premium, or
20 put another way, whether the common level of
21 compensation, which will increase under the UTU
22 agreement relative to other industries is
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Page 198 1 sufficient to achieve the recruiting and retention
2 objectives of the carriers. That is, are they able
3 to recruit and routinely the workers in a way that
4 meets their objective of running the railroad with
5 the type of skilled people that they need. And I'm
6 going to jump ahead slides because I want to get
7 to what I asked people to insert this. This is a
8 slide from Dr. Murphy's presentation. You might
9 think of it as his Goldilocks slide because
10 there's too low, there's too high and then there's
11 right in the middle for Goldilocks. And if the
12 compensation's too low, you're not going to be
13 able to attract applicants. And, you know,
14 ideally, you would like to be able to attract
15 applicants at minimum cost. So that compensation
16 has to be at least equal to what the employees can
17 get somewhere else in the labor market. It has to
18 be equal to their alternative compensation of what
19 they would receive at their next best alternative
20 use of their time. And then if it's too high,
21 these are the implications that Professor Murphy
22 spent a lot of time on, then the economy is going
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Page 199 1 to be extraordinarily easy because everybody wants
2 to work in this occupation, but it has other
3 distortionary effects and Dr. Murphy went into and
4 I don't need to belabor. So the question that I
5 want to ask, that I already mentioned, is, is
6 compensation large enough, or high enough,
7 sufficient, to achieve those recruiting and
8 retention objectives of the carriers. And the
9 answer is yes with a lot of exclamation points
10 after it, I suppose, because all the available
11 evidence is consistent with the points made by
12 Professor Murphy and Dr. Evans about the premium.
13 Really employees are extremely well compensated.
14 How do we know? In a nutshell, an opening in this
15 industry attracts not just dozens but hundreds of
16 applications for every opening. And on this first
17 slide, I'm putting up something that I'm going to
18 talk about later, on average in 2010, or over
19 2010, there were 1.2 million applicants to the
20 four largest carriers. In contrast there were
21 7,455 people hired for those jobs. So that comes
22 out to about an average of 170 people per job. So
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Page 200 1 there's an extremely low probability of leaving a
2 job once one applies, but nevertheless people want
3 to apply. Something not working?
4 CHAIRMAN JAFFE: We were trying to see if we can
5 (inaudible) in the restroom next door who's
6 competing with you. No, we'll find out in just a
7 moment.
8 DR. TOPEL: Okay, so the reason [we know] (ph) as I
9 said in a nutshell, is that openings attract
10 literally hundreds of applicants. The probability
11 of landing a job for an average applicant is
12 extraordinarily low because there's so many people
13 competing for them. And for those lucky few who
14 are hired, hardly anyone ever leaves. So up here
15 on my first slide when I thought of what the
16 objectives of compensation are. The way that
17 economists think of compensation, the way
18 compensation theorists or analysts think about it,
19 is that it's meant to recruit, retain and motivate
20 employees. What I'm just tried to show you is that
21 these unionized rail jobs are really valuable
22 assets, significantly increased lifetime wealth of
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Page 201 1 railroad workers. Let me give you a number for
2 that. It's kind of an eye-popper. There's elevated
3 levels of compensation. And the result, an
4 excessive supply of qualified applicants, and that
5 elevated levels of compensation also means that
6 retention is extraordinarily easy. So what I'm
7 going to try to demonstrate for you six key facts.
8 The first has to do with that brief (ph). If you
9 recall, Dr. Evans noted that there was about an 80
10 percent premium on that total compensation came to
11 about $93,000 a year. That means that the next
12 best alternative use of people's time, the
13 occupations where they can command in ways given
14 their skills, pay about $56,000. So there's a
15 roughly $40,000 premium in there. Now that premium
16 is earned every year. And so over the lifetime of
17 a job that's like an asset that's going, that
18 people get to own once they join the industry. So
19 they want to calculate the present value of that
20 asset and it comes out to be about $600,000. On
21 average, it's higher for some of the unions and
22 the coalition, it's lower for others. We'll get to
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Page 202 1 that - you don't need to put it up yet. And this
2 is why people are willing to queue for these
3 things. It opens into the second part I want to
4 demonstrate for you is the openings attract
5 hundreds of applicants, so it's a probability of
6 getting a job which is already very low. Why are
7 they making the effort? It's that $600,000 premium
8 that they'll get if they join the industry. And
9 then consistent with Kevin Murphy's point and also
10 David Evans' point about the increase in the
11 premium over time. What we find is that the excess
12 supply, this extraordinary number of applicants
13 per opening, is also rising over time, so that's
14 the third point. Fourth, another indication of the
15 relative value of jobs is the quit rate. How
16 quickly do people leave these railroad industries
17 to do something else? And what I'll show you is
18 it's about one-tenth of the quit rate in
19 comparable industries. So that people are
20 extraordinarily reluctant to leave once they get a
21 job. And for senior employees, the quit rate is
22 almost non-existent. Fifth, I'll show you some
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Page 203 1 data on job tenure. Job tenure of employees in the
2 railroad industry about double those of people in
3 comparable occupations, which also indicates
4 they're willingness to stay in the industry for
5 long periods of time because of this high
6 compensation. And finally, I'm going to show you
7 data on the propensity to return from furloughs or
8 lay-offs. And even after a year or longer of being
9 furloughed, 75 to 80 percent of people end up
10 returning if they're re-called to the job. So now
11 we can go on to some of the slides. So what I've
12 shown you up here, are the wealth premiums due by
13 people who joined the industry. And these are
14 based on the premiums calculated by Dr. Evans in
15 terms of the annual compensation. Now for some of
16 the earnings, the wealth premium's very large, for
17 some it's smaller, but the smallest is $313,000.
18 Now how did they get that kind of thing? Well
19 here's one of the ways an economist would think
20 about landing a job in an industry that pays such
21 an extraordinarily large premium. Take the average
22 employee who gets a premium of about $41,000 per
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Page 204 1 year in total compensation. If I had been in that
2 job in my late 1920s, in my late 20s, and I stayed
3 in the job until close to retirement, so on
4 average these people stay for 35 years, then I get
5 that premium for 35 years. The present discounted
6 value of that is the value of a valuable asset. I
7 get that stream of returns every year out into the
8 future. And so I calculated that premium for
9 members of the coalition up here. And you notice
10 for ATDA, it's a principal of $1 million. For NCFO
11 it's down to $330,000, and on average for the
12 coalition as a whole is about $570,000. That's
13 what it's worth to get a job; that's the windfall
14 in gains if you're one of the lucky few, as we
15 show in a minute, it is few, who are able to
16 obtain any work in the industry having applied. So
17 that's the reason, that's the carrot that attracts
18 people to the industry. What's the effect of this
19 carrot? Well, here's the evidence that the
20 carriers attract multitudes of applicants for
21 every hire that they have. So for the four major
22 carriers there I show you the number of
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Page 205 1 applicants, the number of hires, and then
2 applications per hire, so how many people applied
3 for each opening in effect. And for the four major
4 carriers, and as you can see there - does this
5 work? Yes - for example Union Pacific had 128,000
6 applicants for 1,328 jobs, which came out to 97
7 applicants per job. As CSXT, it was 249 applicants
8 for every opening. If you look over all of these
9 positions - woops - if you look over all of these,
10 1.28 million applications were filed for only
11 7,500 openings. That's 172 applications per
12 opening. Now, the interesting fact about this, in
13 collecting these data, I had data for all four
14 carriers in 2010 but I had data that went back to
15 2006 for Norfolk Seven and Union Pacific. So I'm
16 able to show you how this is treated over time.
17 Back in 2006, as you can see here, there were 51
18 applicants per job for Norfolk Seven and Union
19 Pacific but that's increased over time so that
20 their 170 applicants per job is the same as for
21 the other two carriers who I only had data for
22 from 2010. So over time the number of people who
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Page 206 1 are queuing up for these jobs have increased
2 dramatically. Now that's consistent with two
3 things. As Professor Murphy pointed out, labor
4 market conditions are a lot worse today in 2011
5 than they were in 2006. So these jobs have become
6 unusually attractive relative to alternatives. And
7 as Dr. Evan pointed out, the actual wage premium
8 has been increasing over time. So even if labor
9 market conditions themselves in aggregate have not
10 changed much, then these jobs were becoming more
11 attractive than they were in the period back to
12 2006. But that's a really big - you've more than
13 tripled over this period of time the number of
14 applicants per opening. And that's the kind of
15 hiring issue that Kevin Murphy talked about
16 earlier. Now, let me return to, having shown you
17 evidence of people trying to get these jobs, let's
18 see what happens once they have them. So up here
19 I've calculated, I've asked the carriers to give
20 me data on their quit rates over time. So from
21 2005 to 2010 we were able to follow quit rates.
22 And we also went to Bureau of Labor Statistics
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Page 207 1 data, a survey that they call the Jolts Data on
2 job turnover, and we got the quit rates for
3 comparable industries. One, the upper blue curve
4 up here, I'll put it over there, is for all
5 industries, and then the lower dark blue curve is
6 for transportation services, which actually
7 includes rail in it. So the gap with it I'm going
8 to show you, though big, is actually understated,
9 because the bunch of lines you see at the bottom,
10 down here, are the quit rates of the carriers, of
11 the unionized employees of the carriers. And the
12 difference between these two is roughly a ratio of
13 10 to 1. So the quit rate of the carriers is about
14 one-tenth the quit rate of individuals with
15 comparable skills in other industries. Now you
16 might note that the quit rate goes down over time
17 up here. You might wonder why that's true,
18 especially those dates after 2008. Well a well
19 known fact about quits is that they're counter-
20 cyclical. When the labor is pretty bad, you don't
21 quit your job if you have one. And so you might
22 ask well isn't that true for the carriers as well?
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Page 208 1 And you can't see it as well because it's so
2 small. It's like you're standing really far away,
3 like on Mars or something. Because the difference
4 is little bitty. If you really blew that picture
5 up, you'd see a slight decline in their quit rate
6 as well. But the operative thing here is that
7 people hanging onto their jobs but people in the
8 rail industry always hang onto their jobs because
9 they're so relatively lucrative, because the
10 premium is so large. Let me give you some examples
11 over in the right hand table what the quit rates
12 for CSX when we had the quit rates for different
13 occupations as well. And you can see they are
14 miniscule as compared to the average quit rate in
15 the U.S. economy which was 1-1/2 to 2 percent per
16 month. The other calculation that we did in
17 regards to quits is to look at how they vary in
18 seniority. Now in most jobs, in virtually all
19 jobs, the quit rate, the turnover rate, is high at
20 the beginning at the job and then it goes down to
21 some stable level over time as people have spent
22 more time there they become more attached to the
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Page 209 1 job or they're just more matched to their job.
2 What's extraordinary here is how fast it falls for
3 people in the rail industry. They find out that
4 they're well-matched to this occupation or these
5 occupations find out pretty soon, and then the
6 quit rate is extraordinarily low after a year or
7 two of service. And what you can see here is once
8 people go out and they've got significant service
9 in the industry, they don't leave. And those quit
10 rates are well below the quit rates that you see
11 in comparable occupations elsewhere in the
12 economy, again indicating the value of this
13 compensation premium. Another indication of the
14 attachment of people to their jobs is how long
15 they've been there. Now this doesn't tell you how
16 long they've stayed and I promised one of the
17 lawyers for Jones Day that I would tell you the
18 bus stop example so here it comes. The data here
19 are collected in the following way and I've
20 collected it from two sources, one from the
21 carriers, where you say how long has an individual
22 employee who I see at a point in time, say 2008,
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Page 210 1 how long has that employee been working for the
2 carrier? And they tell you the number. And they
3 average everybody's answer to that question and
4 you get the average job tenure of people who are
5 working there in a point in time. We can ask the
6 same question in data collected by the census in
7 the Bureau of Labor Statistics because they survey
8 people and ask them how long have you been working
9 for your current employer. And we can compare
10 those two numbers. And if you compare the two
11 numbers, you'll see that on average for Burlington
12 Northern and CSX, the average job tenure is about
13 17-1/2 years, straight across the board. I'll come
14 back to the bus stop in just a second. But that's
15 roughly double the averages in comparable
16 industries. People in these jobs stay much longer
17 than individuals in comparable jobs elsewhere and
18 again it's that compensation premium at work. Now
19 you might want to ask the question well this tells
20 us how long they've been there. What if we wanted
21 to know how they're going to be there. What's the
22 completed job duration? And here comes the bus
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Page 211 1 stop example. If I wanted to know how long people
2 wait for the bus stop and I ask them all how long
3 you've been waiting, they'd tell me how long
4 they've been there. Now one way I could figure out
5 how long they're going to be there is wait until
6 they get on the bus. But statistically if I just
7 walk around (inaudible) to a lot of bus stops and
8 ask people, I'll get them in the middle of their
9 spell. So those people would be halfway through.
10 So the expected completed job tenure an estimate
11 of that on the rail industry would be something in
12 the order of 35 years. You take your 17-1/2 and
13 multiply it by two and that's how long most people
14 who answered the question can be expected to be
15 there. That's a long time. That's a lifetime job
16 in effect for people whose careers must be
17 starting in their twenties or early thirties. Now,
18 the last piece of evidence I'm going to show you
19 on the attachment of individuals to these jobs has
20 to do with the propensity to go back to them if
21 they're laid off. Now laid offs occur in this
22 industry as they do in many blue collar
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Page 212 1 industries, and employees have the right to be
2 recalled and there are rules about recall and the
3 like. But what we did was to ask the carriers to
4 give us data on each of the individual furloughs
5 that occurred over a period of time. And then we
6 wanted to know if those people were ever recalled
7 and if they accepted the recall offer. And we can
8 tell the difference between the time when the
9 person was laid off and the time when they were
10 offered recall. And then the question is did they
11 come back or did they move on to something else,
12 some occupation or industry? If these jobs are as
13 extraordinarily lucrative as we argued, then you
14 kind of expect that people would be waiting around
15 because this is an extremely valuable asset worth
16 nearly $600,000 to a human person. And most of the
17 furloughs occur among the young. So as you can see
18 here, up to nine months, excuse me up to six
19 months, more than 90 percent of Burlington
20 Northern people returned. Beyond a year and up to
21 18 months where the data starts getting really
22 noisy, roughly 80 percent are returning. So even
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Page 213 1 after a year of not working for one of the
2 carriers, when the phone rings and you're asked to
3 come back, four out of five are still available
4 and wanting to come back. They haven't moved on to
5 something else. That's much higher than you would
6 find in returns from lay-offs in other industries,
7 even other unionized industries. So that's our
8 evidence that people are very willing to come back
9 is that again, that compensation premium that's at
10 work. So let me conclude. I've argued that based
11 on the data provide by Dr. Evans, that a union
12 rail job is an extremely valuable, not just job,
13 it's a valuable asset. Once you've got it, you've
14 gotten a windfall. That's why people queue up, try
15 to get these jobs, why they're willing to apply
16 when the probability of getting a job in the
17 current market conditions is so low, well below 1
18 percent. Existing levels of compensation,
19 therefore, are more than sufficient to meet the
20 curators recruiting and retention goals. And
21 recruiting and retention is the goal of a
22 compensation scheme. There's extraordinary
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Page 214 1 interest in obtaining railroad jobs that's based
2 on the applicant flow-data that I talked about.
3 And there's extremely low turnover and above-
4 average job tenure that's based on the personnel
5 files that I've examined. And increasing total
6 compensation is not going to improve recruiting or
7 retention, but it will make the queue, the number
8 of people who try to get these jobs greater,
9 there's going to be more applicants per position,
10 and if premiums are increased, there will be fewer
11 positions for them to fill. And that's what I've
12 have, what I'm here to tell you today. I'll be
13 happy to answer any questions that you might have.
14 CHAIRMAN JAFFE: Thank you Dr. Topel. Give us just
15 a moment to see if we have any. I think we're all
16 in good shape. Thank you very much.
17 DR. TOPEL: Okay, thank you.
18 DONALD MUNRO: Mr. Chairman I think we're ready for
19 our last witness of the day today. Lisa Mancini is
20 an Executive Vice President of human resources
21 with CSX Transportation and she is here to
22 describe another perspective on the quality and
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Page 215 1 value of current railroad jobs. If I could ask the
2 reporter to please swear in Ms. Mancini.
3 REPORTER: Do you swear the testimony you're about
4 to give on this day is the truth, the whole truth
5 and nothing but the truth under penalty of law?
6 LISA MANCINI: I do.
7 REPORTER: Thank you.
8 CHAIRMAN JAFFE: Thank you.
9 MALE SPEAKER: Make sure you're standing next to
10 the witness.
11 LISA MANCINI: Thank you and good afternoon. I'm a
12 relative newcomer to the railroad industry. I
13 spent the first 20 years of my career in public
14 service but I am very proud to be part of this
15 railroad industry, as are many of the people in
16 this room and even more people out on our systems.
17 I'm going to tell you about why I think railroad
18 jobs are really so great. They're consistently
19 ranked as among the best and most desirable in the
20 country. CNN Money highlights a newly hired
21 freight train conductor in their September 1
22 segment, "Surprising Six-Figured Salaries." In
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Page 216 1 America's Best-paying Blue Collar Jobs, January
2 2010, Ford features signal and track switch
3 repairers, locomotive engineers, railroad brake
4 signal and switch operators. Freight rail is the
5 only industry to make this list three times. The
6 railroads offer a broad range of jobs that allow
7 for rich and varied work experience, with the
8 requirements of a high school diploma, a valid
9 drivers license and perhaps some work experience.
10 I'd like to highlight three of the more common
11 jobs represented in this proceeding. Train
12 dispatchers dispatch and monitor the movement of
13 trains within a defined territory, much like air
14 traffic controllers in aviation. The work with
15 state of the art technology, in a comfortable
16 office setting. Train dispatchers work regular
17 eight-hour shifts and with seniority earn up to 25
18 days of vacation, 20 personal days, 8 paid sick
19 leave days. Average earnings for train dispatchers
20 in 2010 on CSX were over $87,000 in wages. The top
21 earners, so those that worked a lot of overtime,
22 made over $120,000. Signal workers, another craft
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Page 217 1 represented here today, install, repair, maintain
2 and inspect our signal system across our wide
3 network. Most are assigned a specific territory,
4 so travel's not required, while others do travel
5 to work sites requiring overnight stays. Signal
6 workers perform physical labor outdoors. They may
7 operate heavy equipment and they're out there rain
8 or shine. Seventy-five percent work five days a
9 week, eight hours a day. Our traveling gangs work
10 four 10-hour days, sometimes linked, so they'll
11 work eight days and then have six days off. Signal
12 workers also earn up to 25 days vacation, 11 paid
13 holidays, up to 2 personal days, 3 safety bonus
14 days off, and average earnings for CSX signal
15 workers last year, $74, 318. Again, high earners
16 exceeded over $125,000. Locomotive engineers
17 operate the trains on the railroad. They're
18 responsible for the locomotive, as well as
19 mechanical operation of the train, train speed,
20 and all train handling. Locomotive engineers are
21 promoted from conductor rank, all start as
22 conductors, must understand the physical
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Page 218 1 characteristics of our railroad including track
2 geometry and signal placement to properly control
3 their train. Now these are more traveling jobs;
4 only 25 percent work 5 days a week in yard or
5 local train service. Thirty-nine percent work
6 varied schedules with overnight stays, and thirty-
7 six percent work on extra boards. On CSX,
8 engineers earn up to 6 weeks vacation, up to 11
9 personal days and averaged earnings were $79,000,
10 over $79,000. Top earners among our locomotive
11 engineers in 2010 made over $130,000. Although
12 railroading is a 24/7 business, employees are
13 offered a range of work schedules with options for
14 time off as they gain seniority. Looking at all
15 union employees, about half work five days per
16 week in an eight-hour shift. Thirty percent travel
17 and work varied hours. And an additional 18
18 percent work on extra boards, so the widest
19 variation in hours. In terms of time off, all are
20 provided with annual vacation time depending on
21 seniority up to about 25 days or more. All work
22 under agreements that provide personal days. About
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Page 219 1 half have paid holidays, others have more personal
2 time off, personal days if they have to work paid
3 holidays, and about half have paid sick time.
4 Although with tenure - along with tenure comes
5 guarantees of pay and benefits for a significant
6 amount of union employees. By agreement, track
7 workers, signal workers and clerical employees
8 with the requisite years of service are guaranteed
9 that that neither their guaranteed rate of pay nor
10 their benefits will be disrupted due to
11 circumstances beyond their control. So for
12 example, a clerk with six years of service will
13 continue to receive their pay and benefits whether
14 they're furloughed or whether they're displaced to
15 a lower paid job. CSX cares a great deal about our
16 employees and provides them with outstanding
17 training opportunities. CSX invested 22 million to
18 establish a world class training facility in
19 Atlanta, our Railroad Education and Development
20 Institute or REDI. At REDI experienced instructors
21 teach a comprehensive curriculum with hands-on
22 approach to focus on safety, technical skills and
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Page 220 1 business acumen. Trainees are treated like CSX
2 employees from the start, receiving training pay
3 which is somewhat lower than regular pay but full
4 training pay, medical coverage and other benefits
5 provided under their relevant agreements. This
6 training can be as long as six months. Forty-two
7 thousand employees have been trained at the REDI
8 since we opened the facility in February 2005.
9 Railroad jobs are career jobs that provide
10 tremendous opportunities for advancement and
11 growth. From early on, REDI instructors meet one
12 on one with trainees to talk to them about their
13 career paths. Forty percent of CSX's current
14 management team started in union jobs, including
15 sixty-two percent of our operations managers.
16 Among senior leaders, so assistant vice president
17 and above, 30 percent of our senior leaders
18 started in union jobs and nearly half our
19 operations senior leaders. Our chief commercial
20 officer, number three person in our operation
21 started as a car cleaner, our vice president of
22 strategic planning started as a track worker. So
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Page 221 1 there are tremendous opportunities for all of
2 these union employees. While the employees have
3 opportunities for advancement, many choose to stay
4 in their craft and for those who do take
5 advancement opportunities, some decide to go back
6 to the union because they prefer that position.
7 This year 126 union employees were promoted to
8 management, and in the same period 46 voluntarily
9 returned to union jobs. In exit interviews most
10 cited pay, benefits and quality of life as reasons
11 for returning to bargaining unit jobs. Railroads
12 hire diverse and talented workforce and present
13 outstanding opportunities for women and
14 minorities. CSX has won countless prestigious
15 awards, some pictured here, for our strong
16 diversity program. This year Diversity, Inc.
17 magazine ranks CSX 17 amongst top employers for
18 diversity. Although railroads have a physically
19 challenging environment, CSX was recognized by
20 Springboard Consulting as winner of the National
21 Disability Matter Workforce Award for our efforts
22 to recruit persons with disabilities. We also rank
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Page 222 1 third on GI Jobs list of most military-friendly
2 employers. And finally turning to one of our
3 proudest achievements, CSX was selected among
4 4,000 nominees awarded the 2011 Secretary of
5 Defense Employer Support Freedom Award by the U.S.
6 Department of Defense for providing exceptional
7 support for employees serving in the Guard and
8 Reserves. CSX is the only company to win that
9 award twice. Railroads provide extraordinary
10 opportunities for ex-military and those in the
11 military reserves. One in five employees in CSX
12 has a military background and I'd like to share
13 the story of two of these employees. Scott Mahanes
14 has been a United States Marine for 23 years and a
15 CSX employee for 17. A list of his experiences
16 over the past two decades reads like a crash
17 course in world history as he participated in
18 conflicts around the globe. At the same time, he's
19 advanced through progressively more responsible
20 positions at CSX starting with a job as a roadway
21 mechanic and advancing to director of work
22 equipment standards. John Gipe, locomotive
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Page 223 1 engineer, joined CSX in 1994. Until 2001, his
2 status as a member of the Army National Guard
3 caused few disruptions to his work life. On
4 September 11th everything changed and John
5 embarked on nine years of continuous active duty
6 where he still serves today. [Well the long truth
7 that only his job was waiting for him] (ph), CSX
8 has provided benefits above and beyond what's
9 legally required including make-whole pay this
10 entire time, so more than 10 years. Why? To quote
11 John, it's because CSX knows that supporting the
12 military and the citizen soldier means the
13 continuing ability to pursue the American dream.
14 Railroads also provide rewarding and non-
15 traditional roles for women. Pictured here is
16 Becky Hamilton. Becky realized long ago that
17 waiting for a train to pass a crossing might not
18 inspire most women to consider a career move.
19 Nevertheless, with a college degree in hand, Becky
20 embarked on a career that she knew would be non-
21 traditional. Fifteen years after her first day on
22 the job as freight conductor, Becky is pleased to
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Page 224 1 report that CSX is indeed anything but
2 traditional. In her words, Becky joined CSX
3 knowing they offered great pay, benefits and
4 retirement, but quickly learned that it's also a
5 great company that offers vast opportunities for
6 women. Becky today is a Safety Manager. There's
7 been substantial demand for railroad jobs for a
8 long time and you've heard a lot about that demand
9 already today. I'll give you a little bit more and
10 given the recent, both the high compensation and
11 the recent problems in the job market we've seen
12 our demand even increase more. While we're
13 attempting to actively hiring in 2011, U.S. based
14 employers have announced nearly a half billion
15 layoffs. This last month alone, 132,000 job cuts
16 were announced. Although the global and U.S
17 economies continue to struggle, the railroads keep
18 on hiring. At CSX we plan to hire 4,000 people
19 into union jobs this year, over 1,000 of them new
20 positions, primarily conductors and engineering
21 jobs. CSX receives tremendous volumes of
22 applications for each job. I won't repeat the
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Page 225 1 numbers you just heard, but I'll give you a couple
2 of specific examples. Last year CSX received 1,158
3 applications for a single road electrician job
4 that we filled. We received 21, 298 applications
5 for 26 utility worker jobs. We received 3,450
6 applications for 4 purchasing and material clerk
7 positions. Demand for jobs remain strong this
8 year. So far we've received about a half a million
9 applications and expect to receive 525,000 by the
10 end of the year, more than 350,000 have been for
11 union positions. Given the ever increasing
12 applicant flow it's not surprising that the
13 quality of our applicants continue to improve and
14 I'll share a few examples. One is from CSX,
15 another I'm borrowing, because it such a good
16 story, from the Norfolk Southern. Our employee
17 Larry Goodnight joined as an entry-level signal
18 worker. He's a former Air Force Nuclear Commander,
19 holds a Masters degree in information and systems
20 management. He recently decided to pursue a job
21 with CSX to build on his background in
22 electronics. He's particularly excited about
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Page 226 1 working with cutting edge PTC technology. Norfolk
2 Southern's Keith, I may pronounce this wrong,
3 Fitzhugh was given an opportunity to play for the
4 New York Jets, you may have read about him in the
5 newspaper, but he decided to keep his job as a
6 conductor at Norfolk Southern. He cited that he
7 supports his parents and appreciates having a high
8 quality and stable job. Perhaps the best evidence
9 that railroads provide attractive job
10 opportunities is that we want to encourage our
11 children to join the railroad. And pictured here
12 are some people that many of the audience know.
13 Ken Mason Jr., in the vest, safety vest, is a
14 highly talented Florida State University graduate
15 and a third generation CSX employee who joined the
16 company in early 2011 as a PTC helper, one of our
17 entry-level signal jobs. His grandfather and
18 great-uncle each had 40-year careers that started
19 in the mid-1930s. His father, Ken Mason Sr., has a
20 distinguished 35-year career with CSX that began
21 in 1976 as a track laborer. Ken is retiring this
22 month from his current leadership position as
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Page 227 1 Assistant Vice President of labor relations.
2 Success in retaining employees is critical to the
3 success of our business. Retention ensures an
4 experienced workforce and reduces costs associated
5 with recruiting and training. Railroad employees
6 enjoy wages and benefits well above those in other
7 industries who do similar kinds of work. Once
8 hired by a railroad, employees rarely leave.
9 Bargaining unit jobs at CSX are career jobs. Many
10 employees spend their entire work lives at CSX.
11 The average employee tenure further highlights the
12 quality of railroad jobs. The average tenure of a
13 CSX employee today is 14 years, roughly double
14 that of other transportation workers. Over the
15 last three years the average union worker at CSX
16 has 36 years of service at the time of his
17 retirement, his or her retirement. The quality of
18 railroad jobs is further supported by the high
19 percentage of employees that return from furloughs
20 as you just heard. By way of example, our
21 conductors who were recently out more than a year,
22 had an 81 percent return rate. In conclusion, CSX
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Page 228 1 currently offers outstanding opportunities and
2 plans to continue our workforce and invest in the
3 business to meet future customer demands. This
4 year, despite recessionary pressures, we're
5 investing a record 2.2 billion in our system,
6 adding track and signal crews to enhance our
7 infrastructure. CSX currently receives tremendous
8 interested available employment opportunities. The
9 quality of our applicants is the best we have ever
10 seen in our history. CSX does not need to increase
11 its compensation package to recruit or attract
12 qualified applicants. CSX provides career and
13 employment opportunities for its employees,
14 including employees represented by coalition
15 unions. Job tenure statistics demonstrate that our
16 employees value their jobs. Our turnover is at
17 historically low rates. Our employees return to
18 work even after long furloughs. CSX does not need
19 to increase compensation in order to retain its
20 workers. I hope that I've helped you to understand
21 our commitment to our employees and the pride we
22 take in the high-quality jobs we provide. But you
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Page 229 1 don't have to take my word for it. Our employees
2 routinely let us know how they feel about their
3 jobs and the company. I'd like to close with a
4 quote from a sick - 13-year signal maintainer from
5 CSX that he posted on the Internet to job seekers
6 everywhere hoping for an opportunity to work for
7 CSX. "Be persistent. Don't get discouraged. CSX
8 will be last job you have. It will be worth the
9 wait." Thank you.
10 CHAIRMAN JAFFE: I think we're all in good shape.
11 Thank you very much.
12 DAVID MUNRO: Mr. Chairman if I could just sum up
13 what you've heard today. The witnesses from the
14 railroads have had a couple of central messages
15 about their desire to continue trends of
16 investment in this industry and to hire more
17 employees. And those goals are inconsistent with
18 the coalition's demands for additional
19 compensation beyond the package that the railroads
20 have offered based on the UTU agreement. And
21 moreover, given the lack of connection between
22 productivity and compensation, labor contribution
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Page 230 1 to productivity, changes, there is no value
2 offered by the coalitions in exchange for their
3 compensation demands. Tomorrow we will hear first
4 from [Matt Rose] (ph), who will highlight further
5 the capital needs of the industry and its plans
6 for the future and its hopes for hiring, as well
7 as from [Mark Manion] (ph), who will address an
8 additional perspective that has been highlighted
9 by Dr. Topel and Ms. Mancini on the quality of
10 current railroad jobs. We'll then move to
11 healthcare and the additional sub-components of
12 our case, wages and work rules. Unless there are
13 any questions from the Board, that concludes our
14 presentation for today.
15 CHAIRMAN JAFFE: I think we're in good shape for
16 today. Thank you very much. We will stand in
17 [adjournment] (ph) until 9 AM tomorrow. Off the
18 record.
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20
21
22
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