Parallels Among Pension Problems

I hope everyone out there who cares about orchestras is taking the time to follow the airline industry pension crisis.  It’s been captivating to follow the recent round of Senate Finance Committee hearings which are attempting to gather information so Congress can determine how it should update pension-funding rules.

In a nutshell, the problem is some of the largest corporations in the country don’t have enough money in their defined benefit pension plan accounts to cover promised pay outs.

The issue came to a head recently when United Airlines sought after and obtained permission from a federal judge to default on $9 billion in pension obligations to its recent and former employees.  Two-thirds of that $9 billion will be paid by the Pension Benefit Guaranty Corporation, a federal agency that insures private pension plans.

The real problem here is that by agreeing to absorb such a huge loss, the airline is becoming so subsidized by federal bailouts that it’s beginning to resemble a federally run agency, or even a grant supported nonprofit corporation.  Furthermore, by knowing that the government will bail them out every time they get in over their heads, it sets a bad premise for their executive managers.

Apparently, some members of the Senate Finance Committee feel the same way.  An Associated Press article on MSNBC reports,

One member of the finance committee, Sen. Jim Bunning, R-Ky., complained the government was encouraging corporate mismanagement through its lax rules covering pensions. He was also critical of bailout money provided to the airlines last year that was not spent to bolster pensions but used to pay other debts.
“I want to know why we should reward lousy management,” Bunning said, his voice rising in anger.

What’s fascinating about all of this is how closely it parallels many of the issues which cropped up during the most recent round of orchestra contract negotiations.  Much of the contention at larger and middle size budget orchestras centered on what orchestra board members considered a debilitating pension payment obligation.  For example, the Philadelphia Orchestra’s board and management claimed at one time that the current pension structure contributed to a “Roadmap to Extinction”.

As it turned out, the pension fund in the POA had been under funded for a long enough period of time that it caused a great deal of financial hardship when the organization had to eventually fund the accounts.  Because of that, the Philadelphia board originally proposed some radical reductions in the way their pension plan operates, resulting in less risk and responsibility on their part.  That particular situation was covered in more detail in an article I posted from august of 2004.

The problem with this, naturally, is that orchestra boards and managers may begin to assume that current contractual obligations toward retirement benefits may not be obligations at all.  If they always know that they can simply force musicians to reopen the contract negotiations and reduce their obligations then the purpose behind the collective bargaining agreement becomes effectively neutered.  In essence, they’ll begin to see breaking their promises as a matter business policy.

The frustrations expressed by Senator Bunning during the recent hearings should be taken to heart, not only by those in the airline industry but also those who care about America’s orchestras.

The failure to make good on promises to members of the organization should be viewed as bad management, plain and simple.

The rules which establish the business parameters of the orchestra business certainly have their differences when compared to the for profit world.  However, the board leadership serving our orchestras is supposed to be comprised of successful, clever, thoughtful busies people.  They should be sharp enough to realize those differences in order to properly adjust their for profit experience to adequately serve the needs of the nonprofit organization.

The decision to renege on pension promises is just about the worst thing any organization or business can do to its members.  It demonstrates their willingness to injure them in the most detrimental way; by willfully taking away their promised security for a lifetime of service.

Some board executives and senior managers have talked about having the personal fortitude to make the “tough choices” this past year when they proposed these draconian cuts in pensions and other benefits.  But that’s just an evasion tactic; the genuine “tough choice” is to resign yourself to greater personal risk through insisting that more be done to meet past obligations.

Learned behavior doesn’t take long to develop.  If constituencies within the orchestra business continue to reward bad management with concessions which don’t require quantifiable measures toward full recovery by a distinct target date, then they are only enabling continued abuse of the fundamental trust which is the foundation of a productive, successful relationship between board, managers, and musicians.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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