Subcommittee on the Automotive Industry in Canada Committee on March 9th, 2009

[Dr. Jim Stanford]

You've really hit the nail on the head on the legacy costs problem with your question about what happens as the amount of production shrinks.

Legacy costs are composed mostly of two items: first, the pension costs; and second, the health care costs related to the retired worker and ascribed to the portion of an active worker's career that is already over. In essence, they are a form of compensation for work that's already been done. The two main ones are pensions and health care.

Pensions should not be a legacy cost. That's the whole idea of pension funding. A regulation associated with pension funding is that you pay for it as you go along. The problem is that the regulation or the structure has not been successful--because of the volatility in financial markets, because of the dramatic changes in life expectancies and actuarial assumptions, and because, in the case of General Motors, of a weakness in pension regulation at the provincial level; they have access to a loophole. So there is a pension legacy cost, even though there shouldn't be.

For health benefits, there is no pre-funding mechanism. We have been exploring with the companies the possibility of a pre-funding mechanism for retiree health benefits. It would be akin to a pension plan.

So those are the sources of the costs. As production declines and current employment declines, then the legacy costs measured not in dollars but measured per hour of work--or measured per vehicle, as you've suggested--do balloon out of control. We have no control over that. We can't control the fact that they're laying off our people and not producing as many vehicles. That makes the costs per unit look higher.

We have taken many initiatives in this contract that will substantially reduce GM's legacy costs on both the pension side and the retiree health benefits side. I can't put a precise number on it, since it's all dependent on actuarial estimations, but there is a huge legacy cost reduction coming out of this contract.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Stanford.

Mr. Watson.

[Jeff Watson, Conservative, Essex, ON]

Thank you, Mr. Chair, for the floor. Thank you to our witnesses for being here.

You may not know this, Mr. Chair, but in my time on the assembly line at Chrysler, both at Pillette road truck assembly plant and the Windsor assembly plant, Mr. Lewenza was my union president, Local 444.

It's good too see you here today.

[Ken Lewenza]

It's good to see you.

[Jeff Watson, Conservative, Essex, ON]

I have just a minor housekeeping point before I ask some questions, and it is with respect to the question of a national auto strategy. Maybe this is a point that sticks in my craw a bit, but in February 2008, then Industry Minister Prentice announced at the Toronto Board of Trade our four-point auto action plan. I believe Bob Chernecki was there representing Buzz Hargrove for the CAW national executive. He publicly commended the minister for the auto action plan. From that auto action plan, of course, comes the auto innovation fund, which the $80 million federal investment in reopening the Ford Essex engine plant came from. As it stands today, that is the only good news, the only place where the footprint is actually expanding in the automotive industry, with that particular investment.

I think it's fair to say there may be a fulsome debate on whether you think the strategy is comprehensive enough, but I don't think it's fair to say that there is no national auto strategy, in light of those announcements. I leave that for the record. You may want to comment on it at some point.

Mr. Chair, more specifically, the most recent announcement is that there's a tentative agreement reached with General Motors and the CAW. I think the minister has been clear that we commend the step forward. It will now go to some number crunching with some of the other issues in the overall viability of General Motors to see whether the numbers add up and what amount of support can be expected from the federal government.

One of the issues, of course, is GM's unfunded pension liability. To the best of your knowledge, what is that unfunded pension liability currently at? Can you give us a ballpark figure on what you think it is? I've heard anywhere from $4 billion to $6 billion. Are we in the ballpark on that?

[Dr. Jim Stanford]

Well, that depends, of course, on what benchmark you're using. There are a number of different ways that you can evaluate the funded status of a plan--on a wind-up basis, a fully funded basis, a going-concern basis, a solvency basis.

[Jeff Watson, Conservative, Essex, ON]

I believe they're on a going-concern basis.

[Dr. Jim Stanford]

GM funds on a going-concern basis, because the Ontario government has allowed them to do that, but they actually evaluate the plan internally for their own expensing on an accounting basis. It also, of course, depends on the day of the week as far as the financial markets go, so that is another factor.

The most recent public valuation we have suggests an unfunded liability in the $3 billion to $4 billion range, but again, whether that's gotten worse or better depends on how the markets have performed.

[Jeff Watson, Conservative, Essex, ON]

I presume that delinking the pension from COLA for the next three years is a measure to arrest the growth of the unfunded pension liability. Is that correct?

[Dr. Jim Stanford]

Well, that decision reflects both the state of the pension plan and the state of the industry. The reality, particularly as the industry ages and there are more retirees out there, is that the importance of these legacy costs relative to current production costs becomes larger, so we made the very difficult decision to freeze pensions. We have a pension system where you actually have to negotiate the dollars that you get on your pension; it's not a per cent of final-hour earnings or anything like that. It's kind of old-fashioned in that regard. We have frozen the pension rate moving forward for people who retire in the next few years. We've also frozen the existing pensions for people who are out on retirement already, and that will have a substantial impact both on the current cash costs of the company and on the legacy liability associated with the pension plan.

[Jeff Watson, Conservative, Essex, ON]

Does this new collective bargaining agreement then help General Motors pay down their unfunded liability, to make up that unfunded liability, or does it allow them to pay it off? If so, in what time, and how much do you expect that this is going to help in that regard?

[Dr. Jim Stanford]

It's not paying down the liability, it's actually just eliminating some of the liability. A substantial portion of the unfunded liability will disappear because of the changes we've made in this contract. You'll have to talk to GM and its actuaries about exactly what proportion and the exact number of dollars, but it's a substantial change.

[Jeff Watson, Conservative, Essex, ON]

Who do you think should be responsible for the remaining unfunded pension liability? Is it the company, is it taxpayers, with respect to advancing repayable loans for the continued restructuring? Where do you think it should be coming from to bring that back into a much more realistic unfunded liability?

[Ken Lewenza]

It lies in the hands of the corporation.

[Jeff Watson, Conservative, Essex, ON]

Okay.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Watson.

Now we're going to go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Right away I'd like to put a few things into perspective. I didn't find the parliamentary secretary's arguments very appropriate earlier. He told you to use the funds to reinvest in GM, when in fact he is having trouble convincing his fellow Canadians. He needs to be reminded that he voted to give himself $3 billion that he plans to spend as he sees fit. So then, he shouldn't be preaching to you about how you should be spending your money or about what you should be doing with these funds.

That being said, Mr. Chair, it amounts to $1,200 per vehicle that will have to come from the workers' salaries. Even if the price of a vehicle was reduced by $1,200, that vehicle wouldn't necessarily sell better or faster. The parliamentary secretary's argument doesn't fly.

Will the concessions that you have made really result in lower production costs? Are you satisfied with the guarantees that the employer has given you further to the concessions made to GM?

[Ken Lewenza]

I just want to go back to what we said. We are convinced that we have maintained our Canadian advantage against those we compete with in the industrial world, Germany, Japan, and the United States. Again, they are the countries that we measure our costs against in terms of doing business moving forward.

In terms of the position, it was a very good question about the manufacturing footprint and the ability to keep jobs here in Canada. What we were able to get out of General Motors was a re-commitment to future product allocations into our facilities. These should utilize our plants more effectively moving forward. But it will be incredibly important for the Canadian and provincial governments, during the terms and conditions of the loan, to make sure that we maintain our manufacturing footprint here in Canada on a percentage basis, similar to what Prime Minister Harper and Premier McGuinty said in December. Twenty per cent of our existing production is here in Canada, so they'll provide 20% of the loan. The terms and conditions of the loan should protect that 20% of production in Canada. So if a product falls off because it's not successful, they have to add a product to maintain that investment base here in Canada.

[Robert Vincent, Bloc, Shefford, QC]

I see.

Even if you were to grant more concessions or whatever, in any case, you are not dependent on the company's potential actions. You may be asked to make some concessions and the company may poorly manage its assets or production, but I don't think you should be left ultimately to foot the bill. Other members opposite seem to be singing a very different tune. As they see it, things are going wrong because you are overpaid and you have too much money; basically, you're to blame if the automakers are in trouble today.

What would you say to the politicians who believe this to be true?

[Dr. Jim Stanford]

We have argued that the current crisis in the auto industry is global in nature, and I think that's worth keeping in mind. The auto industry has very high fixed-cost investment requirements. Before a single vehicle is produced, an automaker has had to invest billions of dollars in the fixed plant for equipment, technology, product design, marketing, administration, and any fixed costs associated with labour.

The fact that auto sales have fallen now around the world--not just in the U.S.--by 20% to 40% means that those automakers are in desperate straits around the world. So even Toyota is asking for emergency loans from the Japanese government. Governments around the world are stepping up to the plate.

What is unique about North America in this regard is the intensity of the finger pointing at workers and their unions. That is unique to the United States and Canada, and they are the only two countries I'm aware of where the government has made labour concessions a condition for providing assistance to the automakers. They haven't done that in Europe, Japan, or China. In fact, in Japan the government is subsidizing auto wages as a way of trying to smooth the downturn there.

So that's the context. We're facing a very broad global crisis in the industry, where the workers and their wages didn't cause the crisis--I don't think there's a credible story to be told that this crisis is the result of workers' wages--and where most governments are responding by trying to bring labour in as a partner in that process.

In Canada we're trying to do that. Both the federal and provincial governments have consulted with us in this regard, and we're looking forward to being part of the solution. But in the broader culture you'll detect a lot of anti-union enmity, and that is a negative barrier for us as a country in trying to pull together everything we need to make sure we have an auto industry. That kind of finger pointing doesn't help us at all.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Stanford.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

I have a few more questions and I want to get some clarification. As I mentioned before, we're talking about the need to restructure the industry and the significant role the CAW has to play in that.

When I talk to my constituents they generally don't totally understand how the pay structure works within the union agreements, so maybe we can get some clarification. I understand the base hourly starting wage is about $33.50 Canadian for an assembler. There's a lot of conversation around holidays. From my understanding, these assemblers get 17 paid holidays. Typical holidays might be Good Friday and Easter Monday. I think there are several more than I got when I worked in the private sector. Obviously I didn't have the CAW negotiating for me, but I still enjoyed my job and chose to be there.

Can you explain how many paid vacation weeks a five-year employee would get?

[Dr. Jim Stanford]

I have just a couple of points. First of all, the starting wage is not $33.50; it's about $24. We have a very aggressive wage grow-in period. For an assembler, the top wage, once you've gone through that grow-in period, would be about $33.50 or $34.

We have about 15 statutory holidays per year in the current contract, not 17.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Is that in the new contract?

[Dr. Jim Stanford]

It's in the old one. We didn't change the statutory holiday entitlement. Sometimes it depends on where the Christmas break falls, but on average it's 15.