(Really) Long Term Planning Part 2

To continue where things left off from yesterday, we’re going to examine an imaginary historical scenario and determine whether or not it might supply some possible answers to a variety of long term problems facing the industry today.

The BIG Endowment
It is reasonable to say that American orchestras can look at their cousins across Europe, Canada, and Australia and see that at least half of their budgets are subsidized by their governments.  That’s not an altogether different percentage than what American orchestras subsidize through unearned income.

40 years ago in U.S., it wasn’t reasonable for orchestras to expect that the U.S. government was going to start subsidizing 50% of their budgets.  But what about the idea of developing a plan with the goal to create a single source of revenue large enough to generate enough funds to cover approximately 40% of the earned income gap (the amount of money they need to pay for all of their bills above and beyond what they earn from selling their product and services) like an endowment.

An endowment large enough to cover that much of the budget would certainly be a huge  figure, but would it have been impossible to create over 40 years?

As an example, let’s look at an orchestra that’s grown impressively since the early 1960’s; the Indianapolis Symphony Orchestra.  Currently, based on information provided to the AFM, they maintain an annual budget of approximately $24 million and 33% of their budget is derived from earned income.

But let’s say that back in the mid 1960’s the ISO board decided to undertake a commitment to raising an endowment that would one day subsidize 40% of their annual budget.  Based on their current budget figure they would need to earn $9.6 million annually from investment income, as represented in the chart below:

big-endowment-3

If you assume that the on average, the endowment would have an annual 4% draw then the principle needed to produce $9.6 million in investment revenue would be approximately $240 million

If they began this long term campaign in 1965 and took 35 years to reach their goal, then they would have had to raise about $6.8 million per year (adjusted for inflation and the value of a dollar of course).  Granted, this is a very simplistic example but not altogether improbable.

By adhering to a fixed 4% annual draw from the steadily growing endowment, orchestras would have been in better shape to match the demands from musicians for increased salaries and benefits.  During the flush years, the additional revenue for any draw over 4% could be used to match sudden increases in artistic and/or operational expenses and reinvested as endowment principle. The reinvestment would help offset any shortfalls during the lean years where the draw might fall below 4%.

Each year the endowment approached meeting the capacity to supply 40% of the budget, other expenses would summarily decline as the need for raising significant “right now” money decreased.  Development expenditures become less paramount so the significant operational resources devoted to those efforts would have been redistributed to other administrative areas, artistic endeavors, capital projects, or simply eliminated; reducing Indianapolis’ overall expenses.

Currently, Indianapolis allocates 41% of its budget toward artistic expenses (the ICSOM average is 44%).  All things being equal, that figure would parallel the amount of investment revenue they earn from their BIG Endowment. With the single largest fixed expense completely subsidized every other aspect of the institution could operate using a standard business model.

The ramifications on every other aspect of the organization would be considerable:

  • Each concert could be structured to pay for all of the non artistic expenses entirely by ticket revenue they could all earn a profit.
  • Modest concert sponsorship from corporate sources would serve to significantly reduce ticket prices, resulting in higher average attendance figures.
  • The ratio of musicians to administrators would plummet to 4:1 and therefore further reduce overall expenditures of the organization, thus increasing the percentage of the budget paid to musicians and the percentage subsidized by investment income from the BIG endowment.
  • The flexibility to use their earned income as needed would allow each orchestra to better design a unique administrative structure that would best suits their needs.
  • Tensions between musicians and managers would decrease with the creation of a reliable source of income dedicated exclusively toward meeting artistic expenses.
  • Orchestras would never have to rely on future income to pay for current debts, zero-sum budgets would be unheard of.
  • Sharp downturns in the economy would only impact the flexible expense of concert production as opposed to static artistic obligations.

These projections are only a few of the positive outcomes possible and I bet that many readers out there could conceive of just as many unique and optimistic scenarios as these.

The idea of creating a $240 million endowment isn’t as far fetch as you might think, there are two organizations that currently maintain endowments over $240 million; the Boston Symphony and the Metropolitan Opera while three others maintain endowments over $150 million.

Looking Toward the Future
At this point it becomes clear that in order to create stability throughout the industry there needs to be some new assumptions. Every orchestra could stand to use a concept such as The BIG Endowment to help design a really long term plan designed to bring future stability to their organization.

There are some organizations with the inkling of this concept. At the Nashville Symphony, they are creating an enormous endowment designed to subsidize the expense of their current concert hall project and its subsequent operational expenses plus bond interest payments for the next 30 years.

The majority of that endowment is designed to remain in tact even after those bond payments are completed and the hall can support its own operations.  Once that point is reached, that significant investment income revenue will then be free to begin subsidizing the vast majority of artistic expenses, creating a similar scenario imagined by The BIG Endowment above.

Big multi-hundred-million dollar gifts are not merely fantasy or fiction, the most recent example is the whopping $205 million gift to the city of Madison by Jerry Frautschi as a gift to underwrite the construction and design of a world class performing arts facility.

Conclusions
One of the related benefits of chaos is that order will eventually prevail.  Today’s chaotic climate has the possibility of producing a new order or perpetuating the old hand-to-mouth financial model where orchestras collectively move from putting out one fire after another.

What do you think, is the idea of The BIG Endowment (or something similar) just a pipe dream or does it have some real potential?

Will the current generation of musicians, managers, and board members be up to the challenge to create the world’s most financially stable and artistically productive classical music environment?

Can a new model allow orchestras to grow in their own unique directions instead of the current uniformity created by everyone using the same economic model?

What sort of fundamental change needs to take place in the orchestra industry?


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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