Pensions dominate Teamsters’ talks with UPS, freight carriers

The good news for shippers following two separate current Teamsters union negotiations with UPS and a handful of less-than-truckload (LTL) carriers is there is scant chance of a national strike as happened 10 years ago when Teamsters walked out for 15 days against UPS and when they struck the LTL sector in 1994.

The bad news for shippers who like to stay abreast of these talks is these negotiations may be the most complex and complicated set of union contract negotiations since James R. Hoffa, father of the current Teamsters president, negotiated the first National Master Freight Agreement in 1957.

First, some basics. The UPS contract covering 246,000 Teamsters (79,000 full-time and 167,000 part-time) expires July 31, 2008. A separate contract covering an addition 65,000 Teamsters in the LTL sector (including 46,860 at YRC Worldwide and 9,372 at Arkansas Best) expires next March 31. A third set of negotiations covers about 125 Teamsters at a UPS Freight terminal in Indianapolis, but that likely will not be finalized until after the main UPS contract is negotiated.

Wages are not really the major issue in these talks. Workers in both the small package and freight industries can more or less count on 30-to-40 cent hourly increases in each of what is expected to be a five- or six-year contract, according to sources on both the company and union sides.

A UPS Teamster today earns $27.27 an hour ($1,090 per week gross, plus an additional $467 in health, welfare and pension payments). A freight Teamster makes about $22.31 an hour ($892 per week, plus additional $267 in health, welfare and pension payments. UPS drivers will get another $1 an hour increase August 1, and $.60 hour fringe benefit increase also on August 1. UPS drivers earn roughly $5 more per hour than a comparable city driver for a freight carrier. In August, that rises to $6 more.

What makes this set of negotiations so complicated can be covered in one word – pensions. Or, specifically, pension withdrawal liability.

Currently, about 60 cents of every dollar that UPS contributes to pensions goes to fund pensions of retirees of other companies.

UPS and the freight carriers belong to scores of multiemployer pension plans. Because of the decline in unionized carriers and the more than 600 closings of Teamsters-covered carriers in the freight industry since the Motor Carrier Act of 1980 deregulated trucking, the remaining carriers (namely UPS, YRC Worldwide, Arkansas Best and a handful of smaller carriers) are liable for literally billions of dollars in unfunded pension withdrawal liability.

Herve Aitken, a transportation attorney who specializes in trucking pension issues, has estimated that the Central States pension plan, the largest of all the Teamsters plans, has a calculated liability of more than $14 billion. Other estimates run as high as $20 billion—and rising. The lion’s share of such liability falls to companies such as UPS and YRC

“It’s a function of demographics,” Aitken says, noting the average age of a Teamster in the freight sector is nearly 60. “Underfunding on the multiemployer side is only going to get worse.”

That’s because there are only about 155,000 active participants in the Central States plan (down from nearly 190,000 in 2001) while there are about 295,000 beneficiaries (up from 275,000 in 2001). See adjacent chart.

Because such underfunding creates such uncertainty, banks and other investors look at such liability with disdain and it becomes a deal-killer for any acquisition-minded third party. That’s why UPS and Arkansas Best (and perhaps YRC) are looking to make a one-time payment to exit such multiemployer funds and instead take control of them through a joint agreement with the Teamsters. Others agree.

“We strongly believe UPS and its employees would be far better off if it were able to exit the Central States plan,” Bill Fisher, managing director with Raymond James & Associates, wrote in a recent analysis of Teamsters multiemployer pension plans.

According to internal estimates, it would cost UPS about $4 billion to exit these multiemployer funds. UPS, a $47 billion company with plenty of free cash, has that money. One UPS source said the company would make up that $4 billion in savings within four years. YRC’s withdrawal liability is estimated to be close to $4 billion as well. But that company does not have nearly the cash reserve as UPS, and it would have to amortize that amount over 20 years.

Arkansas Best President and CEO Robert Davidson already has said he wants out from the withdrawal liability, and would be willing to spend the $650 million to do so, provided those payments could be spread over 20 years.

The union has not rejected any of these proposals out of hand. Ken Hall, director of the Teamsters parcel and small package division that negotiates with UPS, has called the UPS deal “a serious proposal that has to be seriously negotiated.” That’s a far cry from the union’s stance in 1997 when UPS offered basically the same deal, and it resulted in a 15-day national work stoppage. But that was when Ron Carey was running the 1.3 million-member Teamsters now run by James P. Hoffa. The union has never had a national strike in transportation under the younger Hoffa.