Master Economics Offer A Principled but Pragmatic Response

Master Economics Offer: A Principled but Pragmatic Response to the Crisis Presentation by Jim Stanford, CAW Economist stanford@caw. ca To CAW-Ford Master Bargaining Committee – April 2008

The Loonie’s Destructive Flight Global commodity and oil price boom, combined with record pace of foreign takeovers, has overvalued the Canadian currency. Up 60% in 6 years PPP 30 -yr avg

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World Oil Prices

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UAW Developments 1. VEBA fund to shift legacy costs to UAW-run trust. Retiree health benefits eliminated for new hires. Eliminates $18 -20 per hour in labour cost. 2. Two-tier wages and benefits for new “non-core” hires. Total all-in cost for new hires = $26 (versus $60 for current actives). 3. But don’t forget: UAW deal had increases in a number of areas (bonuses, pensions, etc. ). • And non-core share capped at 20% 4. Strike at American Axle: 9 weeks and counting, GM not too concerned

Challenges in Retiree Funding • Growing ratio of retirees to actives – Ford: 0. 7 in 2005, 1. 1 in 2008 • Makes cost per hour of retiree-related programs very high – Retiree health benefits: $10 per hour (accounting), $4 per hour (cash), almost doubling every contract – PCOLA: each year = $1 per hour • Our bond of solidarity with retirees won’t be broken – but we need to find ways to pay for it • Be very careful about cost control

Nasty Math Cost/Hour = Cost/Retiree * No. of Retirees Active Hours Worked Cost per Retiree: Rising (8% per year? ) No. of Retirees: Up 1/3 in this contract Hours Worked: Falling with each downsizing Result: Cost per hour doubles in 3 yrs - now worth $10/hr (FAS), $4/hr (cash)

FAS Costing Methods • Forces companies to recognize, report, and deduct from profits the full ultimate cost of every delayed benefit they agree to • Makes the cost of future benefits extremely high • Has sparked intense resistance from head office on: PCOLA, retiree health, $25 K retirement allowance, car insurance, others • On the other hand, some times we can use these rules to our benefit through careful benefit design – eg. 2005 caps saved over $400 million

Example: Long-Term Care Current Cash Cost To Ford (2007): Ford’s Reported Liability: $8. 5 million Over $700 million

Employers on the Offensive l i a M lobe & The G ATUS GM: “ST 2008 4 1 l i r p A NGE CHA T S U M QUO” bour a l n a i d a its Can s y a s kers in s r r o o t w o n M a l h a more t Gener says r d u n o a h , . r e S. 0 p in the U s t costs $3 n a l t talks p c o a t r t u n a o n c non-unio st close in 2008 mu this gap CAW. e h t i w

Big Three Shopping List • • • Implement two-tier wages Eliminate COLA Eliminate PCOLA Eliminate retiree benefits for new hires Eliminate existing retiree benefits for existing retirees (long-term care) Eliminate SPA program Slash trades employment and hours Cut back relief time More, more…

Our Strategy • Get anti-concessions message out loud and clear – Focusing on two-tier danger – Warning companies of a fight • Emphasize the need for a Canadian solution • Public statements, membership meetings, news conferences, financial analysts • Hold out a carrot as well as a stick – Do something modest, responsible (and early? ) – Or go to war in September • Scoping discussions with all 3 companies to see if anyone liked the carrot – Ford “bit”!

A Principled, Pragmatic, Nimble Union • CAW has strong no-concessions policy • But CAW has proven it can work creatively to protect competitiveness within the framework of our principles – – Air Canada restructuring (2004) 2005 Big Three contract Local plant operating & “shelf” agreements Auto parts restructuring • Strong membership support continues • Transparency, democracy help facilitate change

A Superior Productivity Record Strong capital spending since the early 1990 s, allocation of high-volume models to Canadian plants, a high-quality workforce, and a commitment to productivity by the union have all contributed to consistently superior productivity results. Productivity Measure Canada U. S. Canada’s Edge Harbour Report (hours per vehicle, 2006) 21. 0 22. 9 9. 2% Vehicles assembled per assembly worker per year (2007) 54. 4 48. 2 12. 8% $128, 500 $91, 600 40. 2% Value-added per auto worker per year ($US, 2006) Source: CAW Research based on Harbour & Associates; Statistics Canada; Industry Canada; Ward’s Automotive; U. S. Bureau of Labor Statistics; and U. S. Bureau of Economic Analysis. Harbour data includes Big Three facilities only. Value-added data converted at PPP exchange rate, and refers to broad auto industry (including assembly, parts, and truck & bus bodies); U. S. value-added data on the assembly sector alone is unavailable.

Strong Operating Profits Assembly and parts. CAW Research from Statistics Canada, U. S. Census Bureau. US 2007 data 3 Q

Canada’s Automotive Success Thanks to superior productivity and quality, and competitive costs, Canada’s share of total North American production by the Big 3 continues to grow.

Exchange Rates & Relative Costs The rapid escalation of the $Canadian has converted our once-large cost advantage into a slight cost disadvantage.

We Took a Long View… Now the Companies Must, Too CAW did not take advantage of the undervalued currency in the 1990 s to boost compensation; the low dollar translated fully into a labour cost advantage.

Already Showing Restraint The CAW’s 2005 Big 3 contract has already dramatically slowed the growth of average all-in labour costs, thanks to small wage increases and health-care savings.

Staying in the Ballpark? Retiree benefits gone

Staying in the Ballpark? 10% 60%

Bottom Line on Relative Costs • Canadian active hourly costs are 10% higher than UAW today ($67 vs 60) • UAW agreement will mostly freeze active hourly costs • Canada has a 10%+ productivity advantage that offsets higher costs – So unit costs are compatible • If we can hold the line on our active hourly costs, we keep ourselves in the ballpark for new investment opportunities • If dollar comes back down (below 90), we recreate a labour cost advantage

CAW Labour Cost Breakdown, 2007 All-in labour costs per active hour worked, 3 -company average. Base Wages Wage Premiums (OT, Shift, AWS) Paid Time Off (Vac’n, Hol, SPA) Active Fringe: Current Health (PAYGO) Current Service Retiree Health (FAS) Current Service Pension Other $34 $5 $9 $2. 50 $2 $5 $4. 50 Sub-total Active Fringe Statutory (EI, CPP, WCB, EHT) Legacy/Retiree (mostly Retiree Health FAS) $14 $5 $10 TOTAL ALL-IN PER HOUR $77

CAW Strategy for 2008 • Union firmly rejects concessions & two-tier wages • Union recognizes change in Canadian cost competitiveness • Union places value on future investments • More restraint (as in 2005 contract) is in the cards • Openness to considering cost-saving alternatives for key contract components – Retiree health benefits

Master Economics Offer • Protects union’s principles – No two-tier – Protect retiree pensions & benefits • Protects total compensation – Total compensation (and hence hourly cost) does not fall – Portions are rebundled • Cost savings are tailored to particular areas to generate large FAS savings for company • Retains relative cost position in Canada

The “Momentum” of our Contract • Problem: “doing nothing” adds 2 -3% per year to our costs – COLA, PCOLA – Health benefits – Other • Challenge: fine-tune the make-up of the package to restrain total costs

Wages and COLA • No changes in base wages • Preserve existing formula and quarterly structure • Freeze COLA for next 5 hits – June 2008 hit – First 4 hits of new contract • $1. 31 (of $1. 36) folded in September 2008 • COLA kicks back in at normal value for 4 th quarter of 2009 (Dec. 2009) • Wages will grow $1+ over life of agreement • Including roll-up costs, adds $1. 40 per hour cost

Pension Summary • 1 year freeze in benefit rates and PCOLA for actives and retirees. • Increases in Basic benefit and 30 n’out Special Allowance in 2 nd and 3 rd year. • Reinstate PCOLA in 2 nd and 3 rd years of the agreement.

Pensions – Current Retirees • For current retirees/surviving spouses and those who retire prior to October 1 2008 • PCOLA is suspended for the first year of the new agreement. • PCOLA increases will be provided effective October 1, 2009 and October 1, 2010

Pensions for Actives and those retiring on or after October 1 2008 • The Basic Benefit Rate and Special Allowance amounts will be increased, effective Oct. 1 2009 and Oct. 1 2010, by an amount equal to PCOLA.

Pension Examples – Basic Benefit Current Retiree (retired Oct. 2007) Active member (retires Oct. 1/08) Active member (retires Oct. 1/09) Active member (retires Oct. 1/10) * PCOLA amount is an estimate only Current Oct 1/08 Oct 1/09 Oct 1/10 $68 $69 $70 ($68 + $1 PCOLA*) ($69 + $1 PCOLA) $69 $70 ($68 + $1 PCOLA) ($69 + $1 PCOLA) $69 $70 $68 ($69 + $1 PCOLA) $70

Pension Examples – 30 & out Current Retiree (retired Oct. 2007) Active member (retires Oct. 1/08) Active member (retires Oct. 1/09) Active member (retires Oct. 1/10) * PCOLA amount is an estimate only Current Oct 1/08 Oct 1/09 Oct 1/10 $3, 515 per month $3, 565 $3, 615 ($3515 + $50 PCOLA*) ($3565 + $50 PCOLA) $3, 565 $3, 615 ($3515 + $50 PCOLA) ($3565 + $50 PCOLA) $3565 $3, 615 $3, 515 ($3565 + $50 PCOLA) $3, 615

Pensions (cont’d) • New Guarantee Options: – The option for a 5, 10 or 15 year pension guarantee will be provided effective October 1, 2009, (single life only; pension will be actuarially equivalent).

Insurances • Optional Dependent Life: 3 Open Enrollments will be offered in January each of 2009, 2010 and 2011. • Survivor Income Benefit Insurance (SIBI) improvements will apply to current as well as future recipients, as follows: • $25 – effective October 1, 2008 • $25 – effective October 1, 2009 • $50 – effective October 1, 2010

Health Care • Effective January 1, 2009 implement prescription drug co-pay for Actives and Retirees of 10% per prescription, with the following out-of-pocket maximums: • • As of January 1, 2009 - $250/family/year As of January 1, 2010 - $270/family/year As of January 1, 2011 - $290/family/year Out of pocket maximums are combined family amounts

Drug Co-pay Examples • • Average cost per active script is $60. First script, requires $6. 00 co-pay. If second script is $75 co-pay will be $7. 50 Once the annual maximum (2009) of $250 is reached, from all family member copays, no further payments are required.

Drug Co-pay Examples (cont’d) • For retirees over 65, the co-pay is still 10%, but for Ontario Drug Benefit (ODB) prescriptions, the co-pay could be as low as 20¢ (if retiree is subject to ODB co-pay of $2. 00) • Remember: – 1967 co-pay 35¢ = almost $3 today – Drug spending in Canada up over 500% since 1985 – UAW 10% co-pay has cap as high as $2000

Health Care (cont’d) • Effective January 1, 2009, cap Long Term Care coverage at $1, 543. 95 per month for new entrants, (grandfather existing residents). This applies to Active and Retired employees. • Huge FAS saving for Ford (hundreds of millions of dollars)

Health Care Improvements Effective October 1, 2008 the following benefits will be improved for Active and Retired employees: • Eye exams amount increased by $20 (to $85) • Vision Care benefit increased by $20 in each category • Chiropractor annual maximum increased by $15 (to $465) • Psychologist annual maximum increased by $25 (to $675)

Income Security • Restructuring Allowances: – Increased from $70, 000 to $75, 000 for production and $90, 000 for trades, plus a $35, 000 car voucher for both • Eliminate $25, 000 retirement allowance – Carried a huge FAS cost • Renew Income Security Fund as agreed per active employee effective September 17, 2008. (Approximately $220 million)

New Hire Grow-In • New-hires are made “whole” within 3 years – Wages (start at 70%) – COLA not added to wages until after 3 years – SUB: accrue credits beginning in second year, but no benefits until after 3 years – Time-off: no SPA until after 3 years, reduced vacation (80 and 88) • Will apply to new hires from ratification

Vacation • Remove mandatory vacation • Reduce vacation entitlement by 40 hours at all seniority levels (3 years and up) • Special $3500 compensation paid in Jan. 2009 • 20 -year person still receives: – – 200 hours vacation 80 hours SPA Long weekends Holidays • CAW still far ahead of UAW, transplants

Other Economic Features • $2200 productivity & quality bonus • Eliminate AWS wage premium – 3 -shift workers will receive 8 hours pay for 8 hours in plant • Extend life of St. Thomas facility to at least end of contract – Company had planned to close it in 2010 • Letter of exploration re new funding method for retiree health

Other Economic Features • Renew special payment (vacation bonus) • $2, 600 automotive discount program for active and retired employees: – Previously program provided for $2, 000 discount on vehicle price and $1, 000 insurance rebate. Rebate was taxable and after tax amount is about $600. – New total amount of $2, 600 discount will leave employees in same position – Program expanded to retirees

Other Economic Features • Renew Appendix 'U' as reflected in the 2005 Collective Agreement: Various Funds • Renew funding for National Training as agreed per active employee effective September 17, 2008 (approximately $25 million)

On Balance, A Step Forward Improvements: Savings: • Wage gains (COLA) • COLA/PCOLA deferrals • Pension gains (driven by PCOLA, existing • Health savings and future) • $25 K retirement • Restructuring benefit • New hire grow-in • Health caps & SIBI • 40 hours vacation • Car allowance • AWS premium (retirees) Savings offset much of the • St. Thomas pledge improvements; Overall compensation protected

Summary • • • Defeated two-tier strategy No wage cuts Defended retiree health benefits Defended SPA system (over 1000 jobs) Maintain and improve overall compensation • Extend life of St. Thomas plant, opportunity to fight for a new product • Principled but pragmatic