There are at present at least three narratives about the AFM-EP Fund crisis floating around online. The first is from the Fund trustees. While I believe they are trying to do the right thing, there are elements of their story that don’t convince me and that, I think, represent a misunderstanding of how pension funds should work.
The second is from the group calling itself “Musicians for Pension Security.” While I find some of what they say interesting, I am skeptical that they are motivated by the desire to maintain the Fund as a going concern over the long haul. That skepticism leads me to doubt most of the information and ideas they’ve put out to date; perhaps unfairly. That doesn't mean they haven't done us all a service by helping to publicize this issue, of course.
The third narrative is from two AFM rank-and-file musicians, Scott Ballantyne from Local 802 and Tom Calderaro from Local 47. These gentlemen appear to have some knowledge of finance, and their analysis is worth reading. It can be found at afmpensionperspectives.com.
My narrative is similar to elements of those of the Trustees and of Ballantyne and Caldarero (henceforth “B&C”). But it is also informed by my own understanding of finance, as well as discussions with a number of folks around the AFM who are knowledgeable about the history of the Fund. My story starts with a fundamental question: what is the “natural” benefit rate (ie multiplier) the Fund ought to have paid over the decades of its existence as well as in the future? And by “natural,” I mean the rate that the Fund could have paid from its inception, through today, without ever calling its permanent viability into question.
B&C have a chart in their presentation on the history of the multiplier from 1966. Their chart shows the multiplier at $1.25 per month per $100 contributed in 1966, rising slowly to $2.65 in 1985 or so. Then the multiplier began to climb more steeply and went to $4.00 in 1990 or 1991. It peaked at $4.65 in 2000. (I have not tried to verify these figures, but they are consistent with what I remember). Their chart ends at that point, but of course we all know what’s happened since.
I strongly suspect that, over that period, the “natural” multiplier was between $2.00 and $3.00 per month per $100 contributed. And, in fact, the multiplier was in that range from 1974 through at least 1987. I would guess that, had the multiplier stayed in that range from 1987 onwards, the Fund would have accumulated very large reserves during the 1990s, and could have used those to weather the first decade of the 21st century without becoming severely underfunded.
So why didn’t that happen? I suspect it’s because of the changing dynamics between the management-side and the union-side trustees. And, by “dynamics,” I don’t mean “relationships” or “competence.” I mean that the balance between competing incentives shifted once the Fund looked like it was heading to being significantly overfunded, which appears to have happened in the early 1990s or maybe a little before. And that shift led to behavior on the trustees' part that now looks unwise.
It’s no secret that union-side trustees of a Taft-Hartley pension fund will always want as high a benefit as is possible. It’s in their members’ short-term, and medium-term, interests. And it’s in the short- and medium-term interests of the Fund and the union both, as it attracts more members into both. Union-side trustees are generally union officers, exquisitely sensitive to the concerns of their members and to the well-being of their union. And that’s how it ought to be in a democratic union, which ours is.
It’s also no secret that the management-side trustees are responsive to the interests of employers. That’s also how it ought to be. Those interests are varied, but one of the major ones is that employers will not have to pay more into the Fund over time than they are obligated to pay under their CBAs. Ideally for employers, of course, those amounts could even be reduced, or at least the pressure at the bargaining table to increase contributions diminished. In short, their interests are primarily in minimizing employers’ expenses related to pension. That might mean, on occasion, raising benefits, but usually not. But that does most definitely mean keeping the Fund adequately funded for the long haul.
Generally, those competing interests, and the equal representation of both employers and employees on Taft-Hartley fund boards, are what keep those funds in balance in terms of making good decisions for the long term. Neither side will let the other one behave in a way that will jeopardize either sides’s long-term interests, regardless of the built-in incentives working on either side.
But, once the Fund began to head towards being overfunded in the early 1990s, the employers’ incentives changed. At the time, as best I can determine from our Google overlords, the federal government penalized overfunded plans in two ways. The first was an excise tax on overfunded plans (although I don’t know how that worked in practice, or how the Feds defined “overfunded”). The second was a penalty on employers; their contributions would cease to be tax-deductible as a business expense. As at the time most of the contributing employers were for-profit enterprises, this would really, really hurt them. And, at that time, all of the management-side trustees came from the for-profit sector.
So, as the Fund headed toward overfunding, the union-side trustees still wanted, as always, to increase benefits. But now the management-side trustees also wanted to increase benefits, as that was the only practical way available to them to avoid the overfunding penalties. And, when the actuaries gave their blessing and told the trustees that benefits could be increased without risking major problems down the road, all the incentives were lined up.
Unfortunately, while actuaries are really good at predicting things like mortality rates for a large group and the demographics of that group and how all those things might affect the Funds’s benefit payouts over time, they’re much less good at predicting market performance. If they were, they probably would be doing something more profitable than being actuaries. And no one is good at predicting recessions years in advance, much less their magnitude and the effect they might have on the Fund’s investments.
The net effect of all of this was that the Fund was in no shape in 2001 to deal with one common-or-garden recession followed, in a few years, by the worst financial crash in nearly a century. Very few Taft-Hartley pension funds were. Tax law positively discouraged them from being so, in fact. (This is a critical point that I believe B&C miss in their analysis). The fact that technically the Fund was considered “fully funded” in 2002 by the actuaries meant nothing for the long term.
Does that mean that the criticisms made by MPS and B&C of the Fund’s management are completely wrong? No. But saying that the Fund is in critical status because the Trustees screwed up is wrong. It ignores history. The trustees, over time, have acted in an entirely rational and predictable manner; neither criminally nor negligently. And the solution to the problem does not lie in accusations of criminality or negligence.
Where does the solution lie? It looks to me as if, at some point, and certainly no later than the next recession, accrued benefits will have to be reduced. I think the solutions proposed by MPS are simply not credible in the real world. And no other proposal is on the table.
I wish that wasn't the case; I helped bring my orchestra into the Fund in 1995. I feel more than a bit guilty that the Fund has not proven to be what we thought it was, and what I told my colleagues it was; i.e. a really good long-term investment. And, of course, a good chunk of my retirement income is at risk. I have real skin in this game, as do thousands of my orchestral and non-orchestral AFM brothers and sisters.
How accrued benefits might be reduced is a different question. It may be that benefits ought to be reduced depending on the extent to which any given multiplier is contributing to the problem; i.e. a benefit earned when the multiplier was $4.25 would be reduced more than when it was $2.50. But I don’t know if that’s even possible, much less whether that’s the answer.
But, however it’s done, I hope that some increase in the multiplier for new contributions is part of the solution. As things are now, current contributions are being used in large part not to fund new benefits for the beneficiaries of new contributions but to make up the deficit in funding past benefits. That’s what a multiplier of $1 per $100 really means.
I don’t think that’s sustainable. It leads (as we have seen) to both employers and bargaining units wanting out of the Fund, and that’s a very unhealthy dynamic. Cordoning off the current benefits and current funding deficit from new benefits and contributions going forward, as painful as that will be, would lead to a higher benefit for future contributions and an increase in the belief in the Fund’s viability and desirability on the part of both employers and AFM members.
I’d be interested in comments and corrections to this narrative, especially those that are based on fact and not on wishful thinking. We’ve had more than enough of that by everyone involved in this mess.
(cross-posted to orchestra-l)
Comments