The Trouble With Balanced Budget Requirements

It is easy to see the benefits of adopting a balanced budget requirement; it helps ensure fiscal stability, promotes responsible spending, and under certain conditions it can even serve to motivate contributed revenue development. But when balanced budget requirements are crafted with too much rigidity, they can harm nonprofit performing arts organizations during periods when they are most vulnerable. Unfortunately, we’re beginning to see more and more examples as the 2009/10 season begins…

Inflexible balanced budget requirements can lead to unnecessary institutional distress.

Although finer points vary from one group to the next, the basic scenario unfolds like this:

    1. As a result of the economic downturn, an organization encounters a sizeable drop in investment and contributed revenue performance.
    2. In order to contend with the revenue shortfall and meet the provisions of their balanced budget requirement, the organization institutes a series of cost cutting measures that reduces and/or defers operating expenses not governed by a collective bargaining agreement.
    3. If these measures fail to produce a balanced budget, the stakeholders represented by the collective bargaining agreement are approached to reopen the contract (or if the agreement is set to expire within that budget cycle, conduct regularly scheduled negotiations with particular focus on concessions).
    4. The stakeholders reject concessionary proposals and offer other concessions and/or revenue development conditions as an alternative.
    5. The board/executive management rejects those offers and submits a final offer that maintains the same bottom line but shuffles some figures around; in turn, stakeholders reject the modified offer.
    6. The organization is thrust into a period of organizational distress and relentless negative public attention.
    7. Eventually, an insufficient agreement is reached and/or the organization suspends operations for a prolonged period of time. The consequence of which is years, or even decades, of hostile labor relations and a multitude of other unnecessary restrictions on reaching institutional potential.

      Sound familiar?

      The bottom line is that a particular brand of flexibility must exist throughout all levels of an organization that employs a balanced budget requirement. When approached with the right process, musicians and managers must be willing to accept provisional concessions but on the flip side, boards must be willing to defer balanced budget requirements in hard economic times. If either group of stakeholders attempts to deal with the economic downturn without this sort of flexibility, they stand to lose much more than the balanced budget requirement was designed to protect.

      Postscript: Fortunately, there’s an upside to this sort of balanced budget syndrome. At the same time, solutions are based around the intrinsic details related to each organization, so if your group is entangled in a seemingly no-win scenario, get in touch so we can see about bringing everyone together toward a win-win solution.

      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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      3 thoughts on “The Trouble With Balanced Budget Requirements”

      1. In general, in thinking about budgets for any organization–profit or not for profit–we tolerate deficits in one year or a series of years if we believe there is a high probability that we can recover from those deficits in the future or if we have already made contingency for it.

        If an arts organization had significant income from an endowment that has suffered a significant loss, it doesn’t appear unreasonable for the Trustees/Governing Body to judge that the organization really does need to reduce the cost structure, as the endowment will probably take a long time to be rebuilt.

        In fact, can’t deficit spending be a slippery slop leading to fiscally questionable behavior (e.g., NY City Opera)?

        In general, ‘balanced budget’ doctrines appear flawed in both the upside and downside scenarios. Flexibility is important, agreed. But the price we have to pay for that flexibility is not spending all of the revenue in the good years.

        This appears to be the fundamental error here, the error that many arts organizations faced before the dot-com bust of 2001: they were spending all their revenue, not allowing for contingencies.

        Where is the arts organization that had built-up a rainy day fund by running surpluses in good times so it can spend in the lean?

        If contingency is not made, then arts organizations and their constituents will need to absorb the shock of financial downturn in their cost base and in their paychecks.

        And hopefully this will be incentive enough to think again before expanding the cost base in 3 or 5 years hence when times are good again.

        • Those are all excellent points Simon, thanks for taking the time to send in all of that. You’ve pointed out the other side of the balanced budget double edged sword but perhaps more importantly, moved the conversation to the point beyond the present which is what does and does not constitute as acceptable business practices.

          I recently finished up a project with a client that required the development of a new business model after the organization lost a large source of regular grant income. In that case, establishing an annual budget that builds a contingency fund via an incremental scale was a key component. Their situation was no different than the one you’ve outlined that most orchestras have fallen victim, too much money in=money out without enough effort toward financial prudence to cover expected fluctuations or periods of growth (and I would add responsible endowment management to that list!).

          In the here-and-now, some groups will have to deal with the problems resulting from the pitfalls mentioned above while avoiding the potential of ending up at point #7. Beyond that, I agree that organizations will be better served by looking toward better financial practices that provide provisional revenue streams along with meeting strategic potential (i.e. the two items are not mutually exclusive).

          One other point you mentioned that might be worth added examination is the potential time frame for recapitalization efforts.There have been some extraordinary examples in recent decades that cover the gambit of success and failure and it would be fascinating to explore those in greater detail.

      2. ‘ seems to me that every time an orchestra folds, it is because of red ink. We may not like it but we orchestral musicians live off the rich folks’ “leftovers”. It is not “the poor” or even “the middle classes” who fund our orchestras. …and if our orchestras were ever completely socialized (NEA would = 100% of funding), you know that would define meager pay for all of us.

        I believe we need to take a more active roll in continuing to encourage “the rich” to support us – rather than leaving it entirely up to “that person in the symphony office” (whom we resent for taking home a bigger paycheck than we musicians do).

        If we and the endowment/fundraising people (together) can’t raise enough money (or aren’t willing to work hard enough to raise enough money) to cover expenses, it’s then time to cut services or people. Otherwise, if we can sustain the lifeblood of our orchestras (money), we should be allowed to continue to perform in them.

        Let’s get real; Who loves our music and what we do with it the most? The “Charlie the Tuna” rich folks who fund and occasionally attend our concerts to show “good taste”, or –> US ?

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