Philadelphia Orchestra says it can't touch endowment for pensions, but musicians demand proof

Posted: June 28, 2011

Will the Philadelphia Orchestra Association be permitted to end its participation in the current musicians' pension plan? And if so, will the association be compelled to tap its $120 million endowment to satisfy the estimated $23 million cost of withdrawing from the pension fund?

In connection with its April 16 bankruptcy petition, the orchestra association has claimed that the $120 million endowment cannot be touched. The principal was designated by donors to remain unspent, the association contends.

A motion filed Monday in U.S. Bankruptcy Court by the American Federation of Musicians (AFM) essentially says: Prove it.

As the largest creditor in the case, the AFM is seeking documentation relating to endowments, grants, donations, bequests, and pledges to help determine whether a pension-fund claim may be satisfied from those assets.

The motion, which requests a broad range of documentation relating to the orchestra's finances and operations, does not ask Judge Eric L. Frank to take specific action beyond granting the start of the discovery process, which is routine. But the musicians union is leaving no doubt about its intentions.

"We will not permit the company to attack the AFM fund without consequences to their endowment," union president Ray Hair said Monday, saying the orchestra association had conceived of bankruptcy as an "escape hatch" to avoid pension obligations. "The donors and the patrons of the Philadelphia Orchestra should keep their promise of a dignified retirement for the musicians who have brought such joy to the world. But if the company implements its strategy of withdrawing from the AFM plan . . . the AFM will look to the endowments to pay that tab. And we will expose the endowments to severe, prolonged stress."

The association has said that any reduction in its endowment will jeopardize its chances of achieving long-term financial stability. The orchestra holds $120 million in endowment; the Academy of Music, which the orchestra owns, has an additional $20 million.

Bankruptcy attorney Lawrence G. McMichael said he had not had an opportunity to speak with the association about the filing, which came late Monday. However, he said: "I have been very clear from the beginning that the endowments are not a rainy-day fund. We have no authority to reach into them to do anything except what they're intended for. We haven't withdrawn from the pension fund. If we do and there's a liability, they can take whatever position they want to take. I don't think they'll get very far."

The orchestra says it has spent most of its unrestricted endowment, and McMichael said it "absolutely" has documentation to show that the remainder is restricted. The Annenberg Foundation's $50 million gift was restricted by the donor, and "dozens and dozens of others are similarly restricted," he said.

Current pension obligations cost the association about $3 million a year, orchestra leaders have said.

The AFM plan has been in the red (underfunded) zone, union and orchestra management officials agree. A separate, internal Philadelphia Orchestra pension program is also underfunded. But Hair says the $1.8 billion fund - with 50,000 orchestra members, Broadway musicians and others, including freelancers, participating - is recovering from the global financial collapse.

"The fund is now funded at 94.5 percent. We're back," he said. "Technically, we're in the red zone . . . but we expect to be out of the woods far earlier than anyone thought."

Hair says the orchestra association does not owe the estimated $23 million to the fund unless it withdraws its participation.

The association has said it does not intend to abolish musician pensions, but would like to replace the defined-benefit plan with a defined-contribution plan, such as a 403(b).

The Philadelphia Orchestra is one of several U.S. orchestras - Louisville, Syracuse, New Mexico - to file for bankruptcy recently, but it is by far the largest and most prominent, making it an important battleground for the musicians' union.

"There has not been a bankruptcy in an orchestra that is one of the top five orchestras. That's never happened before. The entire employment sector is looking at it," said Hair. "If the Philadelphia Orchestra were successful, if it appeared that the tactic of attacking the pension fund was getting traction, then we would be concerned that other orchestras would follow suit. The AFM will not permit that to happen."

Still, Hair said, the orchestra's membership has the autonomy to accept any deal it wants except in matters pertaining to compensation relating to electronic media, which are dictated by a national master agreement.

"The bargaining unit will decide what direction they are going to take - whether they continue to work or strike," said Hair. "They are well represented. . . ."

The AFM's national office has taken on the bankruptcy here and in other cities as a special issue. The union has obtained an AFL-CIO grant to pay for lawyers in the battle.

Negotiations between players and management continue this week with help from George H. Cohen, director of the Federal Mediation and Conciliation Service. But management is expected to fire its own shot across the bow, serving notice as early as Tuesday of its intent to file a motion under Section 1113 of the bankruptcy code asking the judge to set aside the current contract and put in place the association's last best offer. Frank would have 14 days to schedule a hearing. A ruling could be appealed as negotiations continue.

The pension question has the attention of the federal Pension Benefit Guarantee Corp. (PBGC), which, according to its mission statement, "pays for monthly retirement benefits, up to a guaranteed maximum, for nearly 801,000 retirees in 4,200 single-employer and multiemployer pension plans that cannot pay promised benefits."

A spokesman for the agency said orchestra members were covered by the PBGC's safety net if the pension plan ends, but that the agency had not completed its analysis of the orchestra's ability to continue the pensions.

The agency is expected to take a position on the bankruptcy and whether and how the orchestra can meet its pension obligations.

Hair said that if the orchestra withdrew from the AFM plan, it "could potentially worsen the fund's outlook, and the PBGC would be concerned about other employers doing the same thing."


Contact music critic Peter Dobrin at pdobrin@phillynews.com or 215-854-5611.

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