Health Care Costs May Be the Major Issue in the Verizon Union Walkout

Some 40,000 Verizon Communications Inc. (NYSE: VZ) union employees are walking off the job after contract negotiations between two labor unions and Verizon failed. Negotiations with the Communications Workers of America and the International Brotherhood of Electrical Workers have been ongoing since August, and union employees have worked without a contract ever since.

Verizon currently employs 177,700 employees as of its last annual report, which makes this walkout an enormous 23% of its entire workforce. Verizon wants to freeze pensions and make it easier to get rid of workers. It also wants to hire more non-union labor, which it may very well end up doing soon as there are now 40,000 vacancies on its payroll.

Why is Verizon pushing back now? The company’s debt load is not the issue. Verizon does carry a spectacular debt of $110 billion, leveraging it at over 50%, but 81% of that is fixed rate, and a full percentage increase in interest rates would only add $200 million to its debt service costs annually. Nor is it a current overrun in employment costs either, as total employee benefit obligations were below $30 billion in 2015, down from $33 billion in 2014.

A deeper look into its pension plan shows that the answer is probably a combination of Obamacare and retiring baby boomers.
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By far the most sensitive area of Verizon’s pension plan is health care trend rates. A single percentage point increase in general health care costs for Verizon retirees would cost Verizon over $3 billion, while a single percentage point decrease would only gain it $2.5 billion. Not a very good spread, especially considering health care costs almost never go down and that the health care industry is now much more centralized than it was 10 years ago. Add the baby boomer retirement swell into the mix, and Verizon knows it has to at least freeze its pension plan for employees going forward, or risk a big funding hole.

As for the other two issues, making it easier to lay off its workers and hiring more contract workers, the layoff issue is probably a negotiating tactic to eventually exact concessions on the other two. Though giants like Wal-Mart Stores Inc. (NYSE: WMT) are often lampooned for being notoriously anti-union, the importance of hiring more contract workers and relying less on union labor for companies became more apparent one day before the mass strike on April 12 when Los Angeles-based labor unions lobbied the local city council to be exempt from the $15 minimum wage they themselves lobbied for.

Higher minimum wages have long been lobbied for by unions as a way of making it illegal for non-union workers to compete with unionized labor on the free market. The fact that some unions are now calling for a personal exemption from minimum wage laws just for unions simply lays that strategy bare, stripping off the veneer of lobbying for a better standard of living for all workers.