March 2020 ushered in a three-ring crisis for the Equity-League Health Trust Fund, the healthcare plan for theater actors and stage managers.
As the industry shut down indefinitely in response to Covid-19, the fund’s biggest revenue source, employer contributions, largely dried up; its stocks plunged amid a pandemic-induced market crash; and actors and stage managers lost their livelihood. In response, the trustees overseeing the fund’s investments sold all of its publicly traded stock, which as of May 31, 2020 was valued at $25 million, or 23 percent of total net assets of $107 million.
As a result, the fund missed most of a stock market rebound that would’ve generated millions of dollars. The liquidation may slow the fund’s recovery from the shutdown — at a time when few Actors’ Equity Association members, its primary constituency, qualify for even basic coverage and Broadway grosses are off by a third from two years ago.
Fund Co-Chairman Christopher Brockmeyer disclosed the sale at the end of an hourlong video last October that focused on tightened eligibility requirements. “We took a much more defensive approach” Brockmeyer explained, “because, quite simply, we’re not in a position where if our risk assets, our equity [stock] assets, start losing money, we lose even more money in the process that’s getting lower by the month.” Brockmeyer is also the director of employee benefit funds at the Broadway League, which represents producers and landlords in labor negotiations, lobbying and promotion.
Brockmeyer’s disclosure, which didn’t receive media attention at the time, coincided with major cost-cutting. Starting this year, Equity members must work 16 weeks in the previous 12 months to qualify for six months of what’s now its top tier of coverage. Participants previously needed to work 11 weeks to qualify for roughly the same coverage, and an option to work 19 weeks for a year’s coverage was scrapped. As before, there’s a two-month lag before benefits start.
A few wealthy productions, such as Wicked and Hamilton, contributed to the fund throughout the pandemic so their casts could be continuously covered. Other employers have the option to pay a lump sum before work restarts, to hasten the resumption of benefits.
When stocks dropped over the past half century, investors generally did best adding to their positions, or at least maintaining them. “The research shows you should be a buy-and-hold investor with a very long time horizon,” David Yermack, chairman of the finance department at New York University’s Leonard N. Stern School of Business, told Broadway Journal.
The health fund argued that it needed to crouch into survival mode to protect its reserves. “It was unclear how long this shutdown would last, and projections showed that the fund would run out of money to pay health benefits by the end of 2021,” according to a statement a fund spokesman attributed to its 22 trustees. Prudence dictated exiting “a volatile and uncertain equity market.”
Marcia S. Wagner, a Boston-based lawyer whose firm specializes in employee benefits, noted that fiduciaries of health and retirement plans are legally required to diversify investments to minimize the risk of large losses, unless it’s clearly prudent not to. “It’s atypical for a fund of this size to have no equity [stock market] exposure at all,” she said in an interview.
The fund declined to make available any of its 10-member investment committee or the other trustees, who are appointed in equal numbers by the Broadway League and Actors’ Equity and are generally unpaid. Executive Director Arthur Drechsler, who earned $479,000 in pay and benefits in 2019-20, up 5 percent from a year earlier, also declined interview requests. As part of his compensation, he oversees the Equity-League 401(k) Plan as well as the Equity-League Pension Plan, which has about 17 times the assets of the health fund, according to filings with the U.S. Labor Dept.
The health and pension plans were created in 1960, following an 11-day Broadway shutdown over actors’ salaries and retirement security. (The Equity minimum at the time was $103.50 a week, or $966 inflation-adjusted, less than half of today’s $2,323.)
The fund operates independently of the League and the union and is solely responsible for paying benefits, although League and union employees are among its participants. In good times, fewer than 15 percent of Equity’s roughly 51,000 members get coverage from the fund. According to the fund, fewer still cover the cost of their own coverage. Most are subsidized by other actors and stage managers who qualify but get coverage elsewhere, such as from the SAG-AFTRA Health Plan; and by members who work but below the threshold to qualify. (Actors and stage managers need not be members of Equity to work on Equity-negotiated contracts and receive the fund’s health benefits, but most are.)
Since 2014, the fund generally relied on its investments to make ends meet. Expenses — of which 95 percent is spent on benefits, 5 percent on administration — exceed the combination of employer and participant contributions and $8.3 million allocated annually from Broadway ticket sales. But in the two years ending in May 2020, as medical and prescription drug benefit expenses spiked and investment returns lagged, especially once the pandemic started, net assets plunged by $27 million, or 20 percent.
(Adding to its challenges, its former prescription drug benefits manager, ProAct, failed to provide $7 million of agreed-upon rebates, discounts and other payments, according to a complaint the fund filed in New York Supreme Court in February. “ProAct’s breaches have caused significant harm” and exacerbated the financial pain of the shutdown, the fund said in court papers. ProAct denied the allegations and said the fund misinterpreted their contract. The litigation is ongoing.)
The fund had few attractive options during the shutdown. With $15 million of its assets in cash, it had to sell some investments to pay benefits over the next year and a half. It unloaded its stock after May 31, 2020, the end of its fiscal year, and before the previously-mentioned webinar, on Oct. 7, 2020. Brockmeyer disclosed during the webinar that the fund bought bonds with the proceeds. A spokeswoman for the Segal Group, which advises the fund on investing and benefits, declined to comment.
The liquidation was particularly costly because of a shift made years earlier. In April 2016, the fund sold a long-term, profitable position mimicking the Standard & Poor’s 500 Index, the U.S. stock market benchmark increasingly dominated by huge, fast-growing tech companies. Instead, the fund bought U.S. and non-U.S. “value” stocks, which are more reasonably priced relative to earnings and other measures. The portfolio was managed by LSV Asset Management, a Chicago firm founded by finance professors, whose website claims that its “out-of-favor (undervalued) stocks …. will produce superior future returns if their future growth exceeds the market’s low expectations.”
The trade paid off initially. But in five and a half years, the S&P 500 more than doubled while value stocks generally underperformed. The LSV-picked stocks were up only modestly by the time they were sold in 2020. Adding insult to injury, once the health fund shed its shares, value stocks rose more than the broad market in last year’s fourth quarter. (As of May 2020, the fund also held a Pimco all-asset product valued at $21 million, about a third of which is in stocks. The fund declined to say whether it was sold.)
In recent years, the fund phased out its plain-vanilla corporate and government bonds, which became less attractive as yields tumbled. Instead, like other pension and health funds, it bought stakes in partnerships and companies that own a range of assets, such as real estate and bonds of all kinds, including bonds backed by mortgages. Some of the new investments impose restrictions on what can be sold and when. The health fund’s spokesman said the redemption restrictions didn’t weigh on its decision to divest its stocks.
Actors and stage managers I spoke to weren’t aware of the stock sale. Several noted the fragility of the fund. Equity negotiators have an opportunity to put it on firmer financial footing when they negotiate a new Broadway production contract next year.
Substantially increasing employer contributions into the health fund may be a tough sell. But it would help the fund ease eligibility and rely less on investment income.