The AFM Observer

About that pension contribution increase...

It didn’t take long for Musicians for Pension Security to come up with a response to the recently announced increase in required contributions to the AFM-EP Fund. Perhaps, if they’d taken more time, their response would have been more accurate.

So let’s take it step by step, with the questions and answers provided by MPS, as well as my modest contributions to the cause of accuracy.

Question: What does the 10% increase mean? 10% of what?

 Answer: Employers contribute to the pension based on a percentage of annual wages they pay the musicians. Let’s take an employer who pays 10% of annual wages to the AFM-EPF as a pension contribution. That employer will now pay 11% of annual wages into the AFM-EPF.

Commentary: More or less correct. The increases actually kick in when a successor collective bargaining agreement comes into effect, though - it doesn’t affect CBAs currently in force. So it will be several years before all employers are making the additional 10% contribution.

 Question: Is this 10% increase per year, or is it a one-time increase?

 Answer: It’s a one-time increase.

Commentary: Yes, but it’s a permanent one-time increase. Not quite the same as a "one-time increase" suggests.

 Question: Does this mean the pension plan is no longer in critical status?

 Answer: The plan remains in critical status and is likely to go into critical and declining status in the next year or two. Documents from the trustees’ files contain projections showing that even with this 10% increase, the Plan goes into critical and declining status either next year or the year after.

Commentary: Such assiduous sleuthing by MPS! Actually, the notice that MPS links to says essentially the same thing, or at least strongly implies it.

Question: Why are the trustees doing this now?

 Answer: Documents from the trustees’ files show that they are doing this because if they don’t do it, they probably won’t be able to get U.S. Treasury to approve their application for cuts to our pensions.[2]

Under the law, the trustees must apply to the U.S. Treasury to get any cuts. The trustees have been in dialogue with the U.S. Treasury about the best way to frame their cut application.

Commentary: I haven’t read the document in question. But it’s from the Fund’s actuaries, and what it most likely states is that, for the Trustees to make a successful application to Treasury, they will have needed to take a number of steps to try to rehabilitate the Fund before proposing a cut in benefits.

That’s not the same as saying that the contribution increase is motivated by the desire to cut benefits. It could equally well be motivated by the Trustees’ desire to keep out of “critical and declining” status. As a matter of simple fact, such an increase would serve both ends equally. So it’s impossible, absent more evidence, to state definitely (as MPS does), which motive governed the Trustees’ actions. Which, of course, won’t stop MPS from putting the worst (from their standpoint at least) possible construction on the Trustees' actions. That's apparently how they roll.

Question: Why didn’t the trustees do this a long time ago? 

 Answer: The trustees did this in 2010 when they placed the Plan in critical status. Under the law, they had to raise the employer contribution by 9%. Ever since then, the trustees have stubbornly refused to exercise their powers to raise employer contributions any further, claiming that if they did so, employers might leave the Plan, leaving it in worse shape than before. As far as MPS can tell, there is no basis for this fear. The number of employers who left the AFM-EPF after the 9% increase in 2010 has been minuscule. The bottom line is that the trustees should have aggressively raised employer contributions years ago but refused to do it until now and are only doing so to pursue their agenda to cut our pensions.

Commentary: There are an awful lot of assumptions baked into that paragraph. One is that the Trustees had the power to keep unilaterally raising contributions. Maybe that’s true, but I don’t regard it as a given. It seems unlikely to me that, at a minimum, there are no legal limits on that power.

Another is that the Trustees’ fears about employers leaving are unjustified. I don’t think they are. I know that I’ve seen a major fall-off in the number of LS-1 contributions that my Local handles, and those are the only "employers" that can easily stop contributing. It seems likely to me that constantly increasing employers’ required contributions, especially unilaterally, does nothing good to the employer’s willingness to cooperate over the long term with the Fund. And it certainly strengthens any employers’ case in bargaining over wage increases.

I don’t think MSP really understands that such unilaterally imposed increases aren’t all that popular amongst rank-and-file musicians either. I know that, in my orchestra, a number of the younger musicians would quite happily leave the Fund; they simply don’t believe that they’ll get a benefit from it when they retire. I think they’re wrong. But it’s not an irrational point of view.

 Question: With this 10% increase, are the employers finally paying their fair share into the Plan?

 Answer: This one-time increase leaves the AFM-EPF falling far short of national averages for employer contributions. According to recent Congressional testimony, aggregate contributions to multiemployer pension plans from 2009 to 2014 increased by 6.9 percent per year.[3]The trustees have calculated that between 2010 and 2016, sustainable employer contributions at AFM-EPF, factoring out what they called “noise,” has been increasing annually at 2.2%.[4]Our Union leaders have done a poor job of negotiating with the employers, falling far short of industry benchmarks. And the employers have gotten away paying far less than they should have. This one time 10% increase hardly makes up for that.

Commentary: “Fair share”? That’s rich. All of the money in the Fund comes from employers or investments on contributions made by employers.

The fact that “aggregate contributions to multiemployer pension plans” increased by x% doesn’t, by itself, say much. Was it because incomes in those industries went up? Was it because contribution levels were increased by negotiations? Or was it because the trustees of those Fund were more aggressive about imposing unilateral increases?

Absent an answer to that question, saying that contributions to the AFM-EP Fund “only” went up by 2.2% proves nothing about the actions either of "Union leaders" or of employers.

Have “our Union leaders… done a poor job of negotiating with the employers”? Well, it’s usually rank-and-file doing the negotiating; certainly that’s true in orchestras. And it’s always rank-and-file doing the ratifying. So settlements have to be acceptable to the rank-and-file. Would sacrificing wage gains for increases in pension contributions be acceptable to those who vote on those trade-offs? I don’t know the answer to that question. Unfortunately, MPS doesn’t seem to think it’s a question even worth asking.

 Question: How does this 10% increase compare with other pension plans in crisis?

 Answer: This 10% increase is far less than what other plans have asked of their employers. MPS actuary Tom Lowman cited numerous instances where pension plans in trouble obtained 6% increases in employer contributions for multiple years. These included the Baltimore Teamsters and the Central States Teamsters fund. 6% for multiple years of course far exceeds a one-time increase of 10%.

Commentary: I don’t know about the Baltimore Teamsters Fund. But the Central States fund is in desperate trouble; far, far worse than is ours. In fact, the Central States fund is generally viewed as being quite close to bankruptcy. And its bankruptcy will likely take down the Pension Benefit and Guaranty Corporation. That would mean that, if the AFM-EP Fund then went down, beneficiaries would get essentially - nothing.

Question: How does the 10% increase compare with the MPS proposal?

Answer: It falls far short of what MPS proposed, which was 6% increases in employer contributions, for five years, then reverting to 2.9% per year over the next 25 years.[5]The MPS proposal would result in a three-year delay in cuts and cuts that on a present value basis that would be 56.7% less than what the trustees were contemplating.

Commentary: The 10% increase also includes no ponies.

 Question: Won’t the 10% increase make the cuts lighter when they do come?

 Answer: Not by much. Before the 10% increase was announced, the range of cuts contemplated by the trustees was from 23.3% to 30%. The 10% increase will bring this range down somewhat, but the cuts will still be draconian.

Commentary: Well, “draconian” is a matter of opinion. And of course we don’t really know what the cuts might be, or how they’ll be distributed. We do know, however, that if the Fund went into bankruptcy, the cut would likely be 100%. I'd agree that's draconian.

One point not made by MPS is that none of the 10% increase in contributions will go towards new benefits. While this might seem unfair on the surface, such unassigned contributions have a disproportionally positive effect on the Fund’s condition - as, in the past, MPS has noted.

 Question: Are the musicians being treated fairly by the trustees?

 Answer: The books are being balanced on the backs of the musicians. Far from equitably sharing the sacrifices, the employers have been under-contributing for the past decade. This one time 10% move does not compensate for that. Our trustees can and must require more of the employers.  

Commentary: Employers have been contributing what they agreed to contribute, and more (as of 2010). The problem is not that employers are not “equitably sharing the sacrifice.” Even if they did increase contributions, that money would come mostly out of the same pot of money as does musicians’ pay and other benefits. 

The problem is that the benefits promised during the 1990s (at the latest) were more than the underlying contributions could support over the long term.

That’s not to say that employers don’t have a role in fixing this problem; they do, and the Trustees (once again) acted accordingly. But saying that “employers have been under-contributing for the past decade” is simply dishonest. In terms of the benefit promised, employers have been over-contributing since the multiplier went to $1.00 per $100 contributed.

How a pension fund is not a Ponzi scheme

The criticisms I have of how the AFM-EP Fund trustees are handling the current situation focus mostly on communications. My biggest criticism is how the so-called “road show” that some union-side trustees have given around the country over the past year has presented the Fund’s problems.

There has been a lot of talk - not all from the Trustees, of course - about why the Fund is in the condition it’s in. While the Great Recession has taken pride of place, other factors cited have been decreasing contributions, decreasing pensionable employment in the music business, an aging pool of beneficiaries, fewer musicians being in the AFM, the fact that the Fund is taking in less money than it is paying out in benefits, and a few others. MPS has offered additional explanations, having to do with alleged misconduct and negligence on the part of the Trustees.

The net result of these explanations has been to make the Fund sound rather like a Ponzi scheme - which it most definitely is not. (I’m sure it’s not the Trustees’ desire to make it sound that way.) The fact that few seem to have noticed this concerns me as well; it suggests that not  many people involved with this controversy really understand how a pension fund should work. While I am completely convinced that Scott Ballantyne and Tom Calderaro (aka “B&C”) know how pension funds work, even they don’t provide a basic explanation of this that I could find on their site - or at least not one that’s basic enough for people to understand why the Trustees’ explanations for the Fund’s condition miss the fundamental point.

So, to illustrate my understanding of how a fully funded pension plan should work, let me tell you a very long shaggy-dog story.

Once upon a time, there was a happy and democratic union by the name of “The American Federation of Hexanitrohexaazaisowurtzitane Workers." They worked under collective bargaining agreements for various companies that manufactured hexanitrohexaazaisowurtzitane, an incredibly useful and cheap chemical used in the making of all kinds of wonderful things (it isn’t really, but it is a cool word). They had a Taft-Hartley pension plan, naturally called the “American Federation of Hexanitrohexaazaisowurtzitane Workers- Employers Pension Fund” (AFHW-EP Fund for short).

Because everyone in this industry was super-smart, the Fund was run perfectly. It had no expenses, and the combination of contributions and returns on investment of those contributions was perfectly calculated to keep the Fund at a funding level of 100% all the time.

Unfortunately, one day it was discovered, and proven definitively by scientists at Liberty University, that hexanitrohexaazaisowurtzitane emissions, when combined with an atmospheric CO2 level that was just about to be reached, created a perfect funnel in the atmosphere for the transmission of galactic omega rays into the District of Columbia. Such omega rays were known to cause 100% irreversible erectile dysfunction at levels of exposure that would be exceeded within a month of the discovery.

In a triumph of bi-partisanship, the House and Senate immediately sent legislation banning the production of hexanitrohexaazaisowurtzitane to the President, who immediately signed it (after tweeting that hexanitrohexaazaisowurtzitane was all Hillary's fault and she ought to be Locked Up for it). The hexanitrohexaazaisowurtzitane industry immediately collapsed, throwing every single worker who was a beneficiary of the AFHW-EPF out of work.

No more workers, no more contributions to the Fund, no more Fund, right? And then there were lawsuits, and groups such as HWPS (Hexanitrohexaazaisowurtzitane Workers for Pension Security) agitating for the removal of the trustees and their replacement by super-SUPER-smart people, and snarky blog posts by people like me, and all the other paraphernalia of a public controversy.

Actually, not. What really happened was that the Fund continued to manage its assets and pay benefits, and those assets even continued to grow for a while before slowly drifting down to nothing. And all the beneficiaries got their promised benefits. 63 years and 7 months after the ban, the very last beneficiary (the child bride of one of the more junior workers) received a benefit check consisting of all that remained in the Fund’s coffers - and died peacefully in her sleep the next day (unlike the passengers in the car she was driving). The Fund went out of business, in other words, as impossibly perfectly as it had been run for decade upon decade - always precisely 100% funded until the very last day.

That’s the difference between a pension fund and a Ponzi scheme. A Ponzi scheme will collapse instantly when new money stops flowing in, because the benefits promised far exceed what can be paid for by the money paid in by its victims. When the new money stops, most of the victims are left with nothing, because the incoming money simply went to pay off earlier "investors" instead of actually being invested.

By contrast, a pension fund that is 100% fully funded will always have sufficient money in the Fund’s accounts to fully pay for all benefits earned, when those benefits are due, by the contributions paid into the Fund and the returns on investing those contributions - regardless of future contributions, future returns, and future benefits earned. It needs no new contributions in order to honor its promises to its existing beneficiaries.

Unfortunately, in the real world, hexanitrohexaazaisowurtzitane is a highly “energetic” explosive that that no sane person would have anything to do with (it becomes more stable with mixed with TNT).  And, in the real world, no Fund manager can have sufficient insight into the future to invest pension contributions so that their Fund remains exactly 100% funded all the time. To be fully funded at all times in this world means that, for long periods, the Fund will appear to be significantly overfunded, in order to be able to cope with the inevitable financial reverses that face any financial entity over the long term. 

The task for the trustees of such a Fund is to make sure that the benefit level is set so that 1) the Fund never falls below 100% funding; and 2) that the beneficiaries get a fair benefit for the money paid into the Fund under the CBAs that their union has negotiated for them. If, for example, there had been $1 billion left in the AFHW-EP Fund after the final beneficiary check had been sent, the Fund could be considered to have failed the second criterion. That money would essentially have gone to waste (or perhaps to the survivors of the last beneficiary's passengers), as it didn’t go to the beneficiaries over the life of the Fund.

The AFM-EP Fund trustees - and MPS, for that matter - are not wrong in believing that increasing contributions to the Fund will improve its financial condition. But this is because the multiplier of $1 per $100 contributed is so low that it overfunds the benefit the contributions pay for. Much of that new money actually goes to covering the underfunding of past contributions. 

This is not really fair to current workers (although, of course, many of them also have significant accrued benefits as well, which perhaps makes it less unfair, as it increases the odds that those benefits will be paid). Nor does it increase anyone’s willingness to join the Fund, or even to remain in it. That’s why I don’t believe it’s a sustainable solution. 

It’s easy to talk about raising the contribution levels agreed to in the various CBAs with our employers. But I’ve been at the table for a number of negotiations here in Local 8. I have yet to hear an expression of interest by anyone in those negotiations in raising the contribution percentage. Managements view it as money thrown away, and musicians view it as money they could get in their pockets now - that would otherwise be thrown away. This is short-sighted - but completely understandable given the low multiplier and the uncertainties about the Fund’s future.

I think it’s very important to remember that potential solutions to the problems of the Fund - whether decreasing accrued benefits, increasing contributions, improving how the Fund’s assets are invested, or decreasing administrative expenses - are only potential solutions. They are not why the Fund is in trouble. And those solutions can’t change why the Fund is in trouble, because the cause of its problems lies in the past - specifically, in that period during which the multiplier was increased beyond the level that was sustainable over the very long term.

As I see it, that period was the mid-80s through the end of the century. As B&C view things, it was somewhat earlier, likely due to their very conservative view of what interest rate assumptions should underly the multiplier. But, regardless of the exact period, at some point between the late 1970s and 20 or so years later the Fund’s benefit structure went off the rails in terms of long-term sustainability. I told a narrative in my previous post about why that might have happened. B&C have a somewhat different narrative, but the two are not mutually exclusive. (B&C’s version involves no more negligence than does mine, which is to say none at all.) MPS’s narrative of misconduct by the current trustees, however, has nothing to do with reality - even if the trustees made serious mistakes in recent years, which is not something I regard as proven on the basis of what I’ve seen to date.

Past mistakes involving the multiplier can’t be un-made. They can be fixed, but it’s going to be difficult and painful. Doing so will be marginally easier if we all talk about the Fund’s problems with an understanding of what went wrong, though, and if we don't confuse solutions and causes.

 

 

 

 

 

 

 

Another perspective on the AFM-EP Fund situation

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)