Why Didn't APWU Compensation Go Down?

Government Executive and Federal Times both reported today that the House Oversight and Government Reform Committee will be holding a hearing on April 5 on Postal Service pay.   It is clear from quotes attributed to Congressmen Darrell Issa and Dennis Ross that the Postal Service's witness is going to have a very unpleasant time. 

The Postal Service should expect a grilling from members of both parties in Congress.   Congress is the representative of the shareholder and the two largest creditors facing the prospect that their bills for over $5.5 billion will not be paid next fall and similar bills in future years may not be paid.  If the Postal Service takes actions that do not reduce the non-payment risk of those payments due next fall and ones due in future years than Congress is within its right to raise questions as to whether the current Board of Governors needs to be replaced and could even put the new Postmaster General and his management team at risk of replacement.  
The grilling that the Postal Service faces will likely ask one question repeatedly.  Why was the Postal Service willing to sign any contract that did not freeze or reduce the compensation of current APWU members if APWU members enjoy a significant wage premium?  

This will be the central question because testimony was presented by Michael Wachter in 2003 to the President's Commission that stated Postal Service employees enjoyed a 34.2% wage premium has been quoted by Representative Dennis Ross as the basis for his concern that the Postal Service was not tough enough in negotiating the APWU contract.  Dissapointment with the agreement was also expressed by Congressman Darrel Issa who stated "The union contract renewals are the best chance to find new savings. Unfortunately, this looks like a missed opportunity. The Postal Service must show Congress and the American people that it can pay its own way, because the numbers do not seem to add up."


These comments reflect real concern because it is not clear if the Postal Service will have the money to pay the wage increases to current employees in 2012 through the end of the contract.   However, it is not clear that going to arbitration would have produced a more favorable settlement for the Postal Service, even if it presented new testimony of Dr. Michael Wachter that continued to show a wage premium of a similar magnitude.  Having looked at the challenges of unionized firms facing the need to reduce compensation expenses in order to remain competitive found few firms that were able to do this outside of bankruptcy regardless of whether negotiations were conducted under the Railway Labor Act or the National Labor Relations Act.   Even firms without unions find it difficult to impose significant pay cuts on current employees, although it was not uncommon during the last recession for non-union firms to both increase the share of health care premiums paid by employees and eliminate the match to 401-K plans.   Many of these companies have restored these benefits as the recession ended. 
 
The House committee has two options in looking at the compensation question.  The easy way is to bash Postal Service management and grab headlines by focusing only on the wage premium issue.  A more constructive alternative would look at what would be required to bring compensation closer in line to market values.   To do that they need to look at the following questions:

1. Update the Wachter study and include analyses that look at alternative alternative approaches to this question.  
2. Update the Wachter study using the compensation of APWU members under various scenarios under which increasing proportions of APWU members are employed under the new compensation schedules, employee classifications and work rules.
3. Examine the impact of the contract provisions that increase flexibility that allow the Postal Service to eliminate the cost of contracted services for work that an APWU member could do for 2 to 4 hours within a longer shift.  
4. Similarly, what is the difference in cost between using an APWU member and the non-union employee that the Postal Service is planning to displace?
5. Examine the options the Postal Service has to convince existing APWU members to retire.   A large share if not the majority of APWU members are at the highest pay step for the type of work that they do.   Replacing these employees that are earning the highest availalble salary with those who are new would significantly cut costs.   
   
   In particular, the committee needs to ask two questions here.  First, what proportion of APWU members, other postal unions, and management employees are eligible to retire now?  Second, what is the increase in the retirement rate if a VERA is introduced and for retirement incentives ranging between 5,000 and a half year's salary?  The answer to these questions would help illustrate the type of incentive necessary to increase the attrition rate to a level high enough to significantly cut compensation.
6. Examine the arbitration process in order to determine the probability whether the Postal Service would have been generated a better result than what the Postal Service agreed to using either current law or changes suggested by Senator Susan Collins.  This examination should also determine whether alternative approaches allowed by the National Labor Relations Act or Railway Act could have produced a result that would have had frozen or reduced the compensation of APWU employees without the threat of barnkrutcy or liquidataion.

If the committee concludes after asking these questions that the APWU contract and similar negotiated contracts with other unions as well as contracts that arbitration would produce would still be unaffordable, then it must determine if the more drastic option only available to firms in bankruptcy should be pursued.   That would allow the Postal Service to break existing labor agreements and impose lower cost compensation schedules.  In doing so, the committee has to ask how much this option would disrupt the mail delivery system and the probability that the Postal Service will have a business that can generate the cash over the next thirty years to cover its payments on retirement liabilities.

The APWU Contract and How the Process Compares

One of the problems the Postal Service will have in selling the contract with the American Postal Workers Union is the number of new members of Congress with limited understanding regarding the impact of differences in labor law between the law covering the Postal Service and either the National Labor Relations Act or the Railway Labor Act.   In addition many members of Congress will find it difficult to understand why the Postal Service did not take the approach that Wisconsin Governor Walker took with public employees, or President Reagan took with air traffic controllers.


The Postal Service did not have the option to decertify the union as President Regan did as members of the APWU never stopped working after the contract expired. Nor could the Postal Service unilaterally force cuts in compensation as it is not in a legal position that would allow it to break existing contracts and impose contract terms that it would prefer.  A good summary of the negotiation process has been provided by the Postal Service.

Better comparisons are recent negotiations between the Teamsters and both United Parcel Service and Yellow Roadway working under the Labor Relations Act and Conrail that had to renegotiate under the Railway Labor Act.   The following is a brief review of what happened in each of these three examples.

Over the past two decades, United Parcel Service has faced increased competition from FedEx with underfunded multiemployer pension plans sitting over its head. It took a strike in 1997 over the pension issue but eventually had to concede its demand for pension and other contract changes.  Its concessions came once UPS management recognized that the strike gave FedEx an opportunity to prove that FedEx Ground was a credible competitor to UPS Ground service and that the changed perspective would make maintaining marketshare more difficult than before the strike began.   UPS changed its approach to working with its union over the next decade which resulted in a contract in 2007 that allowed UPS to withdraw from the largest underfunded multiemployer plan and make important changes in work-rules and wages that made its operating costs competitive with that offered by FedEx even though FedEx provided service through non-union employees and contractors.
Yellow-Roadway has faced a combination of expanded competition of non-union competitors and a major decline in the nationwide transportation in less-than-truckload market that forced it to combine the operations of its two largest LTL subsidiaries and shutter others. It had also been near bankruptcy for most of the last five years. During this period it had to renegotiate terms of loans multiple times and its stock value plummited to near zero. Yellow Roadway renegotiated its Teamsters contract in 2008 under pressure from creditors However, the problem worsened for Yellow-Roadway when the recession hit and its continuing operations required a second round of compensation reductions with the alternative being liquidation of the business. A new round of cuts were negotiated and agreed upon in 2010 in an effort to save the company. During this period the company cut the number of Teamster employees from 40,000 to 25,000. Even these cuts may not be sufficient to prevent bankruptcy as on March 14, Yellow Roadway stated that it failed to meet a creditor milestone that would allow its creditors to demand full repayment of all loans due.

Conrail faced a different problem in its negotiations as the Railway Labor Act created an environment that forced it to maintain existing contract provisions until a new agreement could be signed. It could have declared bankruptcy which would have allowed it to impose new contracts as has occurred among passenger airlines, but at that time its creditors would have demanded liquidation and would not have supported continuing rail operations under any labor agreement. In addition, political opposition to liquidation was significant as liquidation would have had a significant impact on economic activity from St. Louis to Boston disrupting the ability of the automotive, electric utility and other industries that depended on rail freight service to conduct their business as well as the economies of cities in the from Boston to Washington DC that depended on Conrail operated commuter rail to transport employees to work. Conrail was then forced into a period of extended negotiation with its unions primarily over the elimination of workrules and positions that no longer made sense in a world of diesel locomotive engines. It took almost 8 years to get the changes needed to make Conrail profitable which eventually allowed it to be sold to the public in a public offering.

In all three cases, getting the changes neccessary for a company to survive only occurred once employees were convinced that they had no other options but concede.   For both UPS and Conrail, it took nearly a decade for the changes to be implemented once they were identified.   For Yellow-Roadway, it took less time but the final concession occurred only after multiple reductions in Yellow-Roadway's Teamster employees and the threat of liquidation and loss of all jobs hung over union members' heads.

The Postal Service is in a financial position similar to Yellow-Roadway and a competitive posistion that is closer to what faced both United Parcel Service and Conrail.   Finally, in terms of labor-management relationships, the agreement process has significant similarities to how the Teamsters worked together with UPS, and Yellow Roadway to convince members to accept and implement contract changes.

While its financial position puts it on the brink of default on its obligations to its creditors, creditors have not threatened liquidation like Yellow-Roadway creditors did. 

By eliminating liquidation as an option, the Postal Service is in a position similar to Conrail and must negotiate a contract without the ultimate threat over negotiators from its unions.   The Postal Service is in a better position than Conrail as the threat of binding arbitration, even under current rules forces a time limit to negotiations and existing contract terms.

The Postal Service's position is similar to United Parcel Service as the Postal Service would be hurt by any shut downs, or even slowdowns due to a work-to-rule environment just like United Parcel Service's competitive position was hurt by taking a hard line accepting a strike in 2007.  

The Postal Service's decision to come to negotiate an agreement rather than having one imposed by an arbitrator makes selling changes that would have been included in an imposed agreement easier as the APWU will act a willing partner in implementation, a position that it would not have taken as willingly if similar contract provisions were imposed.  As a partner in implementation, APWU is acting in a manner similar to the Teamster which worked closely with members to explain why changes were required and why changes were best in the long-term interest of employees at UPS and Yellow-Roadway as well as working with UPS and Yellow Roadway to design and implement changes.

USPS, UPS, FedEx Express and the RLA

The choice of labor law (Postal Reorganization Act (PRA) vs. National Labor Relations Act (NLRA) vs. Railway Labor Act (RLA)) going forward for the USPS may not be clear, FedEx has a clear preference for keeping the FedEx Express Service under the provisions of the RLA. FedEx Express's current position under the action has been under attack by United Parcel Service and the Teamsters who would prefer that that FedEx Express status be changed so that it would be covered under the NLRA.

The change is currently included in HR915, the House version of the FAA Reauthorization Act. This would make it easier for the Teamsters, or any other union, to organize FedEx Express employees. The Teamsters, UPS and FedEx have run aggressive lobbying campaigns. Both UPS and FedEx have courted support from various interest groups that received extensive coverage by Politico last summer.

UPS's position is clearly presented on its website. FedEx, in addition to posting its position on its site, has run a numerous set of web-ads (that may have appeared on television in Washington DC) making its position as a satire of UPS's white-board ads.


The future of this fight over FedEx Express's status, and the labor law under which it operates will depend upon action in the Senate on the FAA reauthorization bill and a possible House-Senate conference to follow. Aviation News has reported that further congressional actions is unlikely this year, so this fight will carry on into the 2nd session of the 111th Congress.

What this fight shows is that the RLA provides advantages to non-unionized firms in their effort to stop organizing efforts. As the employees of the Postal Service and UPS are both unionized, this advantage for management has little value to them. For these firms, preference for operating under the RLA, NLRA, or PRA would depend on whether they believe that the negotiating process under the RLA is better or worse than what they now have. Unions representing UPS and the Postal Service have to ask the same question.

Market-dominant airlines and railroads have had significant challenges adjusting labor contracts to fit new competitive environments and new transportation technologies under the RLA. This should caution management of market-dominant unionized firms facing a changing competitive landscape of using the RLA as a model for labor law in their industry. UPS and Postal Service unions should be equally cautious as less is known about how the RLA negotiation process may have helped or hurt airline and railroad employees dealing with an industry in transition.