Status Report—AFM Pension Fund

March 4, 2019

Ray Hair  -  AFM International President

If you’ve been following the status of the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF), you know it has been facing severe funding problems since the Great Recession, despite earning relatively good investment returns since then and receiving a significant contribution increase. As detailed more below, however, these have not been enough to “right the ship.” As a result, the trustees are preparing for a critical and declining certification in the spring and an application to the Treasury Department under the 2014 federal law known as “MPRA” for approval to reduce benefits to the extent necessary to remain solvent for the next 30 years.

Current State of the AFM-EPF

Currently, the fund has about $1.8 billion in assets and $3 billion in liabilities, which is the value of all the future benefits earned by participants, meaning the fund is about $1.2 billion underfunded. Following the end of the current fiscal year on March 31, 2019, it is very likely that the fund’s actuary will project that the fund has officially entered critical and declining status. That means that the AFM-EPF will be projected to run out of money to pay benefits within 20 years of April 1, 2019.

Since 2017, the AFM-EPF has been able to avoid critical and declining status, thanks in large part to strong investment returns and additional employer contributions bargained by the Federation. But, as everyone knows, markets have not performed anywhere near as well this past year as they had for the previous two years. In fact, despite a very strong first three quarters, 2018 was the worst year for US equities in 10 years; had the worst quarter in 46 years; and the worst December in 78 years. 2019 is off to a strong start and helping to offset some of those losses, but, as of mid-February, as I am writing this column, the pension fund is around flat for the current fiscal year that began April 1, 2018. We are in line with other large multiemployer plans out there. No matter how you invest, anyone with a substantial equity allocation is going to be feeling the pain from these market gyrations.

Some have asked whether we can solve this problem with additional employer contributions. As your president, I’ve made it my over-arching goal to negotiate additional employer contributions to the fund under Federation agreements, including millions of dollars of non-benefit-bearing contribution increases over the past few years from streaming revenue. We are committed to continuing that practice in all media negotiations. In addition, the trustees of the AFM-EPF recently adopted an update to the Rehabilitation Plan requiring 10% increases in contributions from all participating employers.

The problem is that the AFM-EPF’s benefit liabilities are increasing much faster than contribution rates can be increased. Just to give you a sense of the size of the problem, the fund’s actuary advises that contributions would have to increase by 25% just to remain solvent over the next 30 years and 50% across the board immediately for the fund to be projected to be fully funded 30 years from now.

What Happens Next

If the AFM-EPF is projected to run out of money in 20 years or less, the trustees have two choices. One option is to let the fund go insolvent. There is a federal government insurer called the Pension Benefit Guaranty Corporation (PBGC), established to backstop insolvent pension funds. Under current law, the PBGC provides funding so insolvent plans can keep paying benefits—but only up to a certain limit based on each participant’s years of service under the fund. For example, under current law, a participant with 30 years of vesting credit in the AFM-EPF would be capped at $12,870 per year, if the Fund ran out of money, while a participant with 10 years of vesting credit would be capped at only $4,290 per year.

That low limit is bad enough. But worse, because of the national multiemployer funding crisis, the PBGC itself is projected to run out of money by 2025. If that happens and if the AFM-EPF runs out of money, most participants’ benefits from the fund would be reduced to virtually nothing.

MPRA Benefit Reductions

The trustees’ other option is to reduce benefits under MPRA. This law allows multiemployer pension funds in “critical and declining” status, with government approval, to reduce benefits to avoid running out of money. Congress passed MPRA in 2014 in response to a growing national multiemployer pension crisis. More than 120 multiemployer pension funds across the nation are projected to become insolvent within the next 20 years.

Both Congress and Treasury created a long and complicated MPRA approval process designed to protect participants and ensure that any approved benefit reductions are necessary to keep a pension fund from running out of money over the long haul.

Under the MPRA’s “goldilocks rule,” the total proposed benefit reductions need to be enough so the fund is projected to remain solvent for at least 30 years. They also cannot be any larger than necessary to remain solvent. This means that there is a specific allowance for cutting benefits, and any application must demonstrate to Treasury that the fund’s total benefit liabilities are being reduced only by that amount, no more and no less. In other words, the trustees have very little discretion over the total amount of reductions.

The fund trustees will need to determine how the reductions will be designed within the overall reduction amount calculated by the actuaries. There are statutory rules that must be strictly followed, including some specific protections that limit benefit reductions for different categories of participants.

• Participants age 80 or older are exempt from cuts.
• Participants between 75 and 79 are partially protected, using a sliding scale based on age.
• Participants receiving a disability pension benefit from the fund are fully protected.

In addition, no participant can have their benefit reduced below 110% of what the PBGC would pay, if the fund ran out of money. For the person with 30 years of vesting credit, this would mean an annual benefit of no more than $14,157 and for the one with 10 years, no more than $4,719, instead of the PBGC limits of $12,870 and $4,290 mentioned above. Our actuaries estimate that, under these rules, more than 50% of fund participants are immune from any benefit reductions under MPRA.

The MPRA rules require that benefit reductions be shared “equitably.” The law provides a list of equitable factors that can be considered by trustees. One factor is how high the multiplier was when participants earned their benefits. If the trustees focus on this factor, they could consider reducing the $4.65 and other high multipliers. If the trustees decided to use this approach, it is extremely unlikely that there would be a need to reduce the $1.00 multiplier.

Other factors that the trustees could consider include the length of time in pay status, whether early retirees who retired before June 2010 are receiving a benefit that does not account fully for the early commencement, and whether participants received post-retirement benefit increases. The trustees can also consider factors that are not listed in the law, such as unique features that this fund adopted when it was in excellent financial condition. Or the trustees could do what some other funds have done that have had benefit reductions approved, and apply an across-the-board percentage reduction to all benefits that are not protected. Whatever the trustees decide, the application to Treasury must include a detailed explanation of the equitable factors that the trustees considered, and how they were applied.

We can’t tell how much any individual participant’s benefit will be cut until the final numbers are calculated at the end of the fiscal quarter before an application is submitted. All we can do is assure you that the trustees’ goal and their obligation under the law is to identify the smallest and fairest benefit reduction that makes it possible for the AFM-EPF to avoid insolvency.

MPRA Application Process

After the AFM-EPF trustees submit a MPRA application, which is currently expected to take place by the end of this year, the fund must mail a notice to each of its 50,000 participants, including an estimate of the proposed reduction to the participant’s monthly benefit. The fund’s application will be posted to the Treasury Department’s website, and the public will have an opportunity to submit comments. Treasury has 225 days to approve or deny the application.

If the application is approved, there will be a vote by participants and beneficiaries of deceased participants. Under MPRA, for an application to be rejected, a majority of eligible voters must vote against it. Unreturned ballots are effectively counted as “yes” votes. Also, for very large plans like the AFM-EPF, which are deemed to be “systemically important” (that is, insolvency of that fund would have a disproportionately adverse impact on the entire multiemployer system), Treasury will either override a “no” vote by participants or revise the application in order to approve it.

Assuming the fund submits an application at the end of 2019, we expect that reductions would not occur before late 2020 or early 2021, although the timing could be affected by many factors. This is a process that will require difficult decisions reached by consensus among the trustees. And the trustees understand the deep personal impact of any cuts on the participants, including ourselves. We are keenly aware of and focused on that.

Retiree Representative

Another MPRA mandate is that large pension funds that apply to reduce benefits must appoint an independent “retiree representative” to advocate for the interests of retired and terminated vested participants and beneficiaries. The trustees have appointed Brad Eggen to fill the role of retiree representative. Eggen is a 50-plus-year member of the AFM and is the current president of Twin Cities Musicians Union, AFM Local 30-73 (Minneapolis-St. Paul, MN). He is an attorney in private practice. Although Eggen wasn’t formally appointed until recently, he has been attending trustee meetings for about a year to get educated about the fund, and to participate in preliminary discussions about a possible MPRA rescue plan. Eggen has proposed setting up what he calls an “equitable factors panel,” made up of several participants from different parts of the industry. He will also communicate directly with participants as the retiree representative and will retain his own independent lawyers and actuaries to help him fulfill his responsibilities.

Pension Legislation

The Federation has been lobbying Congress to provide a different, more comprehensive and fairer solution than benefit reductions in response to the current multiemployer pension fund crisis. Fund trustees and employers have also been lobbying for the same goal. So far, Congress has not agreed on any solution, although with Democrats taking control of the House last fall, the landscape has changed in Washington, DC. Our eyes and ears are now on the House Ways and Means Committee, chaired by Congressman Richard Neal (D-MA), who promptly reintroduced the Butch Lewis Act in the House. If progress toward a legislative solution can be achieved during this Congress, labor unions must be united behind a concerted solution. Federation Legislative and Political Director Alfonso Pollard is a member the AFL-CIO’s pension working group, which is attempting to promote legislative consensus among unions. Pollard and I have made frequent personal visits to key members of Congress to lobby for the enactment of the Butch Lewis Act, which would provide low-cost, long-term loans to troubled pension funds in amounts necessary to avoid benefit reductions.

Fund trustees believe that we need to pursue two tracks simultaneously—energetically advocating for federal legislation that fully sustains the long-term solvency of our fund, while also taking every action available to us under existing federal law to prevent the fund from running out of money to pay benefits. If Congress enacts a new law that provides a better solution, then we can withdraw our MPRA application. And if legislation passes after benefit reductions are in place, we can apply to roll back benefit reductions. In fact, the Butch Lewis Act requires this.

Conclusion

The AFM-EPF will keep participants informed throughout the MPRA process. Union trustees will face the same cuts to our pensions as everyone else. But we also know that the alternative to filing a MPRA application is to face the possibility that our pension checks may disappear almost entirely.

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