So What's Up With Minnesota?

In case you missed it, the Minnesota Orchestra (MO) seems to be gearing up for trouble. The 12/7/2011 edition of the Minnesota Star Tribune published an article by Graydon Royce that reports the MO is posting a $2.9 million deficit, or slightly less than 10 percent on of their $30.4 million annual budget. What’s intriguing in this situation are the details from the orchestra’s leadership.

In particular, the following quote from MO board chair Richard Davis which explains why the orchestra intentionally drew less from endowment income than previous years should catch your eye.

“We need to grow revenue and cut expenses outside the amount we draw from investments,” said Davis. “We need to show a structural deficit because these draws on the endowment are not sustainable. We are beginning the trip toward discipline.”

What isn’t clear in the article is whether or not the organization has been drawing exclusively on investment income or into the principal. If it’s the latter, that’s not necessarily a sign of fiscal instability and could be as much of an indication of prudent debt management as opposed to anything dire.

For example, borrowing from endowment principal as opposed to lines of credit can produce a measurable savings by removing interest. Likewise, if an organization has a long standing track record of replenishing principal within a few years of the initial draw, then there are no real red flags to be concerned about.

And since there’s no information on annual fundraising efforts and related success, the structural deficit reference in Davis’ comment is fairly nebulous. Consequently, we don’t know if these scenarios define the MO’s situation or not. Ideally, the MO will release additional details in the near future.

Royce’s report also points out that the bad news comes in advance of collective bargaining negotiations which, all things being equal, will begin in a few months. According to additional quotes from Davis, it seems clear that the board is gearing up for a concessionary contract.

Davis said on Tuesday that he and [MO president and CEO Michael] Henson have met with the musicians three times to discuss the deficit and that the board of directors intends to ask the union “for the same expense commitments that we’ve asked from the staff.” He said he did not believe any measure taken would affect artistic quality.

As an aside, Davis should get an award for raising the bar on pay cut euphemisms with the “expense commitments” statement but perhaps that’s just a Minnesota thing. Speaking of that, conductor Bill Eddins posted an article at Sticks and Drones shortly after the Star Tribune article came out with a set of equally intriguing questions, it’s worth your time to give it read.

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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0 thoughts on “So What's Up With Minnesota?”

  1. Isn’t the “borrowing from principal” vs. “assuming new debt” (i.e. lines of credit) analysis much more complicated than avoiding interest on the debt? For starters, by borrowing principal, you’re losing the ability to earn interest on that segment of your investments, not just for a few years but for the life of the endowment.

    Loss of compounding interest = big red flag (even if you repay principal within a few years).

    Also, for a fixed period of “a few years of the initial draw,” the CAGR (growth rate) for the endowment is likely to be higher than the interest rate on a line of credit, especially with interest rates being as low as they are these days.

    I see plenty of short and long term red flags for borrowing from principal vs. assuming new debt (provided debt financing is available as an option) – all pointing toward the unsustainability mentioned by Davis and all begging to be solved by generating stronger operating margins (making more and spending less).

    • Sometimes it is that simple and sometimes no. But what’s important is for outsiders to understand that touching endowment principal is not, in and of itself, the root of all evils when it comes to managing debt. I know several groups who are doing exactly that (and yes, they go through the processes to determine that it is indeed the best solution) but they don’t put it in press statements because of the stigma. In the end, it’s easier to move forward with it and not spook donors by keeping it quiet rather than opt for a solution that doesn’t have the intellectual baggage.

      In every case I’m aware of, the decision is the right one to make but clearly, it’s not for everyone nor is it the right option for every situation. In the MO situation, there isn’t enough information available and that’s the part their stakeholders need to focus on in the here and now so the right questions can rise to the surface. Your compound annual growth rate (CAGR) point is a perfect example. How has the organization’s endowment performed before and after the economic downturn? What have capitalization efforts produced? The article draws attention but projects an incomplete picture and it is now up to the MO (whether they wanted to be in this position or not) to begin filling in the gaps.

  2. To me this seems like nothing more than artful posturing, arranging the numbers to provide an easy excuse to pile concessions on the musicians in the next contract. Many times large donors are quietly asked to hold back until the contract is settled. This is the Kabuki we go through in this business whenever a contract is in play. It just gets more creative over time.

    • Thomas, this seems different- while having gone through many negotiations with this type of posturing I think there are some other issues in play here.

      One thing that Drew didn’t mention is the fact the MN Orch is embarking on a $45M renovation to the lobby of Orchestra Hall which will displace the orchestra and it’s audience for a year. I haven’t seen anything that is being done to ensure subscribers will be around for the following season but the info the musicians have been given is that the orchestra will be operating under a ” new business model” when it returns.

      What’s not clear is whether there is the same commitment to the artistic quality that happens within the hall as there is to the bricks and mortar of the hall itself.

      and if you read Bill Eddins article you will understand that as a member of the orchestra I probably shouldn’t say any more…..

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