Philadelphia Orchestra negotiating split with pension fund

After months of sparring in bankruptcy court, the Philadelphia Orchestra Association and the national musicians' pension plan from which the orchestra is withdrawing are negotiating the terms of their split.

Under discussion are the amounts the association would pay, and over what period of time, to the American Federation of Musicians and Employers' Pension Fund (AFM-EPF), said the orchestra association's lawyer, Lawrence G. McMichael. Although the association won't contribute to it anymore, the fund will still be responsible for providing some benefits players earn.

The association also plans to negotiate how much it will owe the Pension Benefit Guaranty Corp., the federal agency that will assume future obligations of two other pension plans - earlier ones covering musicians and staff.

The national musicians' pension fund says it is owed about $35.5 million; Pension Benefit Guaranty has filed claims with the court for about $61 million, although, because some of those claims would cancel others out if paid, the actual shortfall is closer to $42.8 million.

Eventual settlements with both groups - which presumably will end up being a fraction of the claims - might be paid over time after the orchestra emerges from Chapter 11.

The AFM-EPF has argued in court that a portion of the orchestra's $100 million-plus endowment should be used to satisfy what it is owed because of the association's withdrawal. It has proposed that certain donors did not intend for their gifts to remain in the orchestra's endowment unspent in perpetuity, potentially freeing up money to satisfy creditors' claims.

AFM-EPF lawyers pursued what they believed could be a fruitful strategy at a November court hearing, showing that although the orchestra tracked restricted and unrestricted endowment funds separately, the funds were commingled in the same accounts. In other bankruptcy cases, that kind of structuring has made assets once considered out of reach vulnerable to paying out claims.

Rather than risk objections from the AFM-EPF or other creditors to the forthcoming reorganization plan, the association would like to reach an agreement with the AFM-EPF now, "which is the way things ideally work in bankruptcy cases," McMichael said Friday. "With any luck, we'll get a deal."

Several discussions have been held recently with the AFM-EPF, he said. Reaching a deal involves "horse-trading" amounts and terms. "Obviously, the simplest term is all cash, up front immediately. But if we negotiate 10 years to pay it off, the number will be bigger. When we're talking to the AFM Pension Plan and the [Pension Benefit Guaranty Corp.], we're discussing both the amount and the terms under which it will be paid."

The orchestra filed for reorganization April 16 not because of crushing debt, but to lower costs and restructure relationships with a number of constituencies. A new, deeply concessionary labor contract was reached with musicians. The association ended its merger agreement with the Philly Pops, paying the smaller group $1.25 million to do so. In addition to the AFM-EPF and Pension Benefit Guaranty Corp. matters, the association seeks changes to its lease agreement with the Kimmel Center, landlord of its major concert venue, Verizon Hall.

Those talks continue, McMichael said. One possibility is a consolidation of the two groups, but negotiations "may or may not be done fast enough . . . to do it in bankruptcy. There may be a need for an interim deal of some sort that would involve a change in rent agreement. We need a broad series of changes in the way the relationship works, and we do have to get there."

McMichael said that if the orchestra can file its confirmation plan with U.S. Bankruptcy Court in February, it could leave Chapter 11 in late April or early May.

That's later than the end-of-2011 exit the association originally forecast. The cost of the bankruptcy also has exceeded expectations. In its strategic plan, the orchestra estimated that professional costs would total $2.9 million, but bills filed with the court for lawyers and other bankruptcy and labor consultants have reached $5.5 million.

The latest estimate, McMichael said, is that related professional fees will come to $8.5 million (slightly more if the fees of the law firm used to renegotiate the musicians' contract are included).

It is too soon to calculate the amount of labor, pension, rent, and operational savings to be realized through the restructuring, but McMichael said the lawyers' fees would more than justify themselves.

"If it costs $8.5 million for us to get there, that's a good deal," he said.