Monday, April 18, 2011

Intiman Theatre, the Philadelphia Orchestra and the issue of transparency

The venerable Philadelphia Orchestra filed for bankruptcy.
By Barry Johnson

The news over the weekend was grim, confusing and bi-coastal. The mighty Philadelphia Orchestra filed for  bankruptcy, though it has an endowment of $116 million. And Intiman Theatre in Seattle closed its doors for the rest of its season, though it successfully reached it Phase One $500,000 emergency fund-raising goal a couple of weeks ago.

The Philadelphia Orchestra has threatened this course for a while, but Intiman's decision came as a surprise. Still, what was missing from both organizations, both the mighty and the small, was the degree of transparency about their operations that would give potential donors confidence to contribute to them yet again.

At the end of the day, didn't they owe the public better numbers and better explanations than they gave us?

By most important measures -- budget, musician salaries, critical judgment -- the Philadelphia Orchestra ranks toward the top of all American symphonies. Saturday, its board of directors filed for bankruptcy, hoping to get out from under a $3 million annual pension payment for its musicians among other things. One suspects that all of those board members have generous pension arrangements themselves or are so wealthy that they don't require a pension, and this imbalance is the source of much of the emotion around the decision, I suspect -- musicians leafleted the board meeting and refused to leave the building when guards asked them to leave, according to the Philadelphia Inquirer account.

The Detroit Symphony's musicians strike gave us a preview of the Philadelphia bankruptcy vote -- a community divided against itself.  And though the Philadelphia Orchestra board also announced a $214 million fund-raising campaign to help shore up its finances, the tension between musicians and the board and its management team surely won't help this effort.

We've talked at length about the failure of community in Detroit, so I won't repeat those arguments here. Instead, the Philadelphia situation reminds us that symphonies, even those that say they are in perilous straits, aren't nearly transparent enough about their financial situation.  They speak in generalities: Philadelphia board chairman Richard B. Worley said there was a "fantastic imbalance" between revenue and expenses, for example, but he didn't go into specifics. No one trots out the numbers from the past several years -- attendance, ticket revenue, donations, grants, board contributions, government support, ancillary income -- so we can see the trend lines easily on the revenue side, and the same goes for the expense side of the ledger.

Here's what the Philadelphia Orchestra revealed in its letter to patrons:
Our financial situation is serious and the simple facts are these: Our operating funds are rapidly dwindling and will be exhausted by June 2011. While the Orchestra does not have any debt, we are operating at a significant loss with a structural deficit of $14.5 million.
And that's it. If I were going to give even $100 to the symphony, I would want to know more than this.
We can go to Guidestar and find some more numbers, though they aren't recent.  The orchestras 2009 returns (for 2008) show a precipitous drop from the previous year:  total revenue went from $53.1 to $29.5 million, as investment income, contributions and grants plummeted. Philadelphia wasn't the only orchestra to experience this downward spiral that year, the year of the Great Recession. Salaries went up a little that year, but other management cut other expenses. The bottom line was a $17.45 million loss compared to a $6.2 million surplus the previous year.

We don't have numbers from 2009 or 2010, which are crucial to plotting the general direction of things. Has revenue begun to creep back up toward 2007 levels? If so, then it's entirely reasonable to use the orchestra's large endowment to keep the course steady. That's what endowments are for, among other things -- to cushion the blow of unusual economic circumstances in the country and to make sure management mistakes aren't catastrophic. On the 2009 return (for 2008) the endowment dropped from $121 million to $93.3 million, as investments cratered.  Now, it's back up to $116 million, though as with many endowments, there are restrictions on its use.

The symphony board claims that pension obligations are the major problem its bankruptcy filing is addressing, though the musicians union disputes the board's numbers. But the point here isn't to do a financial analysis of the symphony, it's to point out that we don't have the full picture. And if we don't have the details, we don't have any way of telling whether the board's interpretation of events is accurate, not that the board has offered much in the way of an interpretation to begin with, judging from press reports and the letter to patrons.

Without the details to bolster a convincing narrative, the community of classical music supporters in Philadelphia can't make a rational decision about contributing more than $200 million to the orchestra. Pew Charitable Trusts, the city's largest foundation, decided against contributing to the effort, at least for now.  If the Philadelphia Orchestra wants public support, it must have the public's trust. The first step in earning that is transparency -- we need to know what's really going on.

While we're on the subject of financial transparency and lack thereof, Intiman Theatre closed its doors for the rest of the season and dismissed its staff over the weekend. That wouldn't be so surprising, if the company hadn't recently announced that it had reached its first emergency fundraising goal. The chronology:
Now, Intiman faces financial problems of an entirely different order from the Philadelphia Orchestra -- it's far smaller and has almost no endowment at this point. But how exactly did that happen? Here's the explanation on the theater's website: "Our primary intent has and continues to be to preserve the future of Intiman — and our hope was to save the season, too. Simultaneous efforts to accomplish both are simply unattainable." But what about the $500,000 they raised? That seemed like such a firm number way back in February. The statement doesn't even have an apology, a "sorry, we miscalculated, and now we've decided to close." What's Intiman's community supposed to make of it all?

Just as a practical, public relations matter, both Intiman and the Philadelphia Orchestra need to be a lot more transparent about their operations and offer better, more complete explanations of how they arrived in their current situations.  That's simply how you build public support for public institutions.


MightyToyCannon said...

Ouch and ouch. Lots of explaining is certainly needed in both situations. In the case of the Intiman, one notes that its fiscal year and season run from April through March--so the 2011 season is being cancelled after only one of five productions. The official notice on the company's website includes this: "We are still working through details of how this impacts our constituents and will have more information available in the next week. All ticket holders will receive information in the coming days."

In other words, they're still trying to figure out what to do about season subscribers and other advance ticket buyers. To the extent that the company has any cash sitting in the bank right now, we can safely assume that a good portion of it is from subscribers and, therefore, still "unearned" and a liability on the Intiman's balance sheet. Anytime a subscriber to a performing arts company's season gets stiffed, it undermines trust across the board.

Barry Johnson said...

Yeah, Intiman bailed on the 2011 season almost entirely. Now, I think they'll need to say exactly how they are going to spend any money they raise. So many details are missing from how they are going to unwind from all of this. Not sure how they'll be able to make it back...

cynseattle said...

aargh...just wrote a lengthy comment here, but hit publish only to see "sorry, unable to complete your request." Too bad -- I had all kinds of interesting things to say about INTIMAN, ACT's turnaround, subscriber tickets and our similar experience in Portland with MTO...sigh. Maybe I'll try again after this test to see if it works :-)

BJCefola said...

How do arts organizations deal with forecasting revenue and expense? Do boards typically get good and understandable information on where things are and where they are going?

An organization can't be transparent about what it doesn't know.

Barry Johnson said...

Sorry, Cyn. Yeah, if you write a long comment sometimes, it "fails." I should post a warning! (It's happened to me, too.) I'd love to get your thoughts on this, though. BJ: I think companies the size of Intiman (and certainly the Philadelphia Orchestra) generate decent financial info and make reasonable revenue and expense projections. Now, whether the boards "digest" than information, test the narrative the staff gives them, etc., is more case-by-case. But I'm confident they have far more info than they've released.

MightyToyCannon said...

Ha! Moments after reading Cynthia's woes in losing her long comment, I then wrote my own long comment and lost it!

MightyToyCannon said...

I'll try again (this time having saved my comments elsewhere):

Providing arts boards with good financial information is fraught with challenges, including:

(1) Forecasting ticket sales is really, really hard. How will the audience respond to the title? With what will the show be competing for audience attention and dollars? What will the weather be like when the show is on? Will it get good reviews and word of mouth? Will it get the cover of the A&E? Does anyone pay attention to the A&E anymore?

(2) Many (most) board members don’t understand financial statements, or pay attention to them until a problem can’t be ignored any longer. They trust management to interpret the financial statements and to be transparent and honest. That’s fine until it’s not.

(3) It’s often too late. By the time you’re in the middle of your season and your sales targets are being missed, there’s little flexibility in responding. Contracts have been signed, actors cast, sets and costumes have been built, subscriptions have been sold. Often the only place to hack away at expenses is the marketing budget and that’s like shooting yourself in the foot.

(4) In the middle of a cash-flow crunch, it’s hard to be thoughtful and optimistic. When a board sees that payroll won’t be met, and when it lacks confidence in its own ability to make a difference, it panics and is unable to be thoughtful and strategic about the long-term. I think that’s what happened with Portland Rep.

(5) Many (most) board members haven’t internalized a sense of “ownership” and responsibility for the health of the organization for which they serve. Nobody “owns” a nonprofit, but a board should feel a deep sense of responsibility for it as if it does.

Barry Johnson said...

MTC, Sorry and thank you -- those are great points from one who knows! With lots of smaller and/or troubled companies, cash flow -- when your money comes in -- can be the killer. Small companies often can't get a line of credit with a bank (and Portland Rep had exhausted its line of credit, as I remember), so even if they are in the "black," they can come up short when paying salaries or payroll taxes or a major supplier, and then they are completely exposed. I've seen this happen a lot (and not just with non-profits).

Your point about not having wiggle room to adjust is well taken, too. You are reduced to a few alternatives -- laying off staff, furloughs and yeah, the marketing budget, none of which is very palatable.

And I love your take on the board and the sense of ownership...

Thanks for persevering!

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