VERIZON EXPECTS TO SAVE ON ITS NEW LABOR CONTRACT

The new tentative agreement on 5-year contracts announced by Verizon, CWA and IBEW late Thurs. will cover 79,000 employees in 13 Northeastern and mid-Atlantic states. The tentative agreement, which was reached through negotiations led by the Federal Mediation & Conciliation Service since July 29, must be ratified by union members, a process expected to take several weeks.

Legg Mason estimated Verizon might save $1 billion-$1.7 billion over the life of the new agreement. UBS called it “a reasonable compromise [for Verizon] after weighing the pros and cons.” It said although Verizon wasn’t able to remove provisions on job security or movement of work, “the company achieved savings on wages and health care expenses and avoided what could have been a prolonged and costly strike.” Tom Kochan of MIT and Harry Katz of Cornell U. estimated that a strike would have cost a minimum of $16 million per day in lost wages. In 2000, an 18-day strike led to a backlog of 250,000 repairs and new phone orders that took several months to process. UBS said it hadn’t estimated the impact of the settlement or strike preparations on earnings for 2003 and beyond, but said it believed “the company’s ability to hit its numbers in the near term will be tied more toward voluntary separations than previously expected, likely increasing the cost of right-sizing the business as competition intensifies.”

“This is the longest contract in the telecom industry, [and] we feel it gives us important competitive advantage providing certainty to the operating environment,” Babbio said. He said the new “unprecedented” contract “maps out our way to balance our needs to manage the size of our work force with the unions’ request for wage increases,” and “removes the threat of a strike until 2008.”

The main changes in the new contract from the one signed in 2000 include: (1) The 2003 contract calls for annual discussions on wages and job security, with changes being made only on mutually agreed-to matters. Preserved job security won’t apply to new hires. (2) The new contract calls for no wage increase in 2003, but for an 8% increase over 5 years, compared with 12% increase over 3 years under the 2000 contract. The new contract also would reduce the bonus to $500-$700, down from an $800 annual bonus. (3) The 2003 contract provides for a one-time 3% lump sum payment in Oct., where the 2000 contract provided a stock option grant of 100 shares. Babbio said because base wage wouldn’t be increased until next Aug., “the 2% annual increase for the remainder of the contract will be on a lower starting point.” He said using a 3% lump sum in the first year would save $600 million over the life of the contract. (4) The new contract provides temporary pension enhancement -- a 5% increase through the end of the year and 11% increase over 5 years, while the previous contract provided a 14% increase over 3 years.

Babbio said a newly developed mechanism to reduce head count though retirement incentives was “critical as our challenge is to stimulate attrition and replace some of the workers who would leave with low-paid nonprotected employees.” He said some temporary incentives “created to encourage retirement-eligible associates to leave the company voluntarily included a lump sum payment of $10,000 in addition to our traditional severance and a 5% pension band increase with a lump sum option window which expires in the 4th quarter this year and reopens in November 2004.” Babbio said: “With interest rates at historic lows,” and “with over 12,000 retirement eligible associates in the Northeast, we expect it to be a significant way to [reduce] our work force in the 4th quarter.”

The key component of the agreement is the right to hold structured discussions annually on wages and job security with involvement of the federal mediator, Babbio said. The discussions will balance any wage increase above those agreed under the contract against the needs of the company to size the work force, he said.

Babbio said Verizon also expected to save $500 million due to some health care changes, primarily for active employees over the term of the contract. He said the bulk of the savings would come from Verizon’s greater ability to negotiate directly with health care vendors, giving the company more leverage and flexibility in designing health plan offerings to manage costs overall. The agreement also calls for some increases in employees’ co-payments and deductibles.

The new contract also calls for joint CWA/IBEW/Verizon committees to be established to address incidental absence, which is “a costly problem, especially in the Northeast,” Babbio said. He said the committees would be established on a geographic basis and would develop plans to reduce absences and improve administration, with particular attention to employees with a record of excessive incidental absences.