A bankruptcy and a canceled season: inevitable or entirely avoidable ends?

Recently, the Philadelphia Orchestra announced it would be filing for chapter 11 bankruptcy protection (the reorganization variety) and Intiman Theatre in Seattle let go of its staff (including its artistic director) and canceled its season in an effort to get a handle on its operations and save itself from an imminent death. These announcements (on the heels of other similar announcements) prompt a few questions:

First, whenever I hear that an arts organization has had recurring deficits (often leading to the accumulation of excessively high debt), my first question is: does this organization’s trustees know how to read an audited financial statement and a cash flow statement? This is a sincere question. Just a few weeks ago the Intiman boad announced that it had (nearly) met its first fundraising goal and had hired Susan Trapnell to help the board and artistic director come up with a long term plan. Upon being hired, Trapnell evidently made the pretty quick (and astute) judgment that the short-term operational and fundraising plan that had been in place was not a viable one (hence the layoffs and canceled season).

I know Susan and have the utmost respect for her and faith in her abilities; but why did the Intiman board need to bring Susan in to tell it that its plan was unrealistic? The Intiman trustees are presumably smart people, some of whom even run businesses; couldn’t they tell by looking at the financial statements that $1 million was not going to be enough to keep the organization going given its debt-to-income ratio and cash flow projections? I mean, c’mon. Furthermore, you don’t need an MBA to know that if expenses are exceeding revenues year upon year that the business model is not sustainable and at some point the cash is going to run out.

Unless I’m missing something, it seems that this situation might have been addressed years ago (either through permanent closure or through a restructuring of the organization in order to bring expenses in line with revenues). If it had, then perhaps Intiman could have avoided laying off its entire staff and canceling its season on such short notice. It seems that the staff and artists that work with the Intiman, as well as subscribers, suppliers, and donors are the ones now paying for the fact that this situation was allowed to get so out of control.

Second, who are the winners and who are the losers when  a nonprofit organization files for bankruptcy? Another sincere question. I understand that there are serious consequences to declaring personal bankruptcy. But is this also the case when a corporation, and specifically a nonprofit corporation, declares bankruptcy? I ask because in the announcement the Philadelphia Orchestra sent to its donors bankruptcy protection seems like a mere speed bump on the way to brighter days. The letter actually strikes me as rather upbeat in tone, all things considered. I think it’s worth asking who or what benefits from this ‘strategy,’ as it’s been called; and who or what is harmed?

To be fair, the letter does talk about the causes of the $14.5 million structural deficit. The leadership writes: “Yet, let us be frank about the myriad factors contributing to the financial challenges we face. Our structural deficit has been created by a decline in ticket revenues, decreased donations, eroding endowment income, pension obligations, contractual agreements, and operational costs.” They then go on to ask their patrons to stick by them and contribute to the upcoming “Listen with Your Heart” campaign. I found myself reading the letter again, looking for a sentence in which the board and staff actually take responsibility for having, evidently, made some poor decisions over the years. It’s not in there.

And, OK, I’m just going to ask this: In the case of Syracuse Symphony, (and other debt-saddled arts organizations filing for Chapter 7 bankruptcy protection), I find myself wondering whether its filing has amounted to, in essence, a ‘get out of jail free card’? Especially with comments in the press that they don’t want to “burden” a future organization with “the current symphony’s debt, pension liability and musician contract”. Unless I misunderstand the comments in the papers, it seems to me that it may be the current board that does not want to be burdened with repaying the debts that accrued under its watch or to honor contractual agreements to which it agreed.

Again, I find myself wondering who are the winners and who are the losers in this scenario? I’m not saying that Syracuse Symphony and other organizations that have reached the point of no return should not close their doors. But there is another way to dissolve an organization: having responsibly paid all of one’s debts and obligations and having created a financial transition plan for the staff and musicians. Of course, for this to happen one must recognize that the end is coming and have the courage to close in time, when one can still do so gracefully.

Finally, is it just me, or is it concerning to anyone else that we have evolved our major cultural institutions to a point where they are so highly inflexible that in order to ‘downsize’ or ‘transform’ they must run themselves into the ground and then declare bankruptcy?  Or cancel their seasons and lay off their staffs? Again, I may misunderstand these situations. I only know what I’ve picked up from the press articles. I welcome enlightenment from others.

These events do not come as a surprise to me (or probably to most who have been following these organizations for any time). Evidently, these ends were a long time coming. In that sense, they might have been inevitable. However, the very fact that they were a long time coming leads to me think that these ends might also have been avoidable.

Image of keyboard with ??? instead of  ‘enter’ key by Fuzzbones licensed at Shutterstock.com.

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Comments

  1. says

    One point to consider is that under the American system of funding, the availability of future resources is often erratic and highly unpredictable. Bankruptcy is not due to a lack of planning, but rather it is a necessary and established practice of arts management from the outset. The evidence is the sheer number of orchestras in the USA that have employed the bankruptcy option like the orchestras in San Diego, Miami, Kansas City, Albuquerque, Syracuse, Tulsa, San Antonio, New Orleans, Denver, San Jose, Colorado Springs, and Philadelphia – to name a few off the top of my head. There are many more. And there are many more that have drastically reduced their budgets like Seattle, Detroit, and Charleston without declaring bankruptcy. People who find this a mystery are those ignore the realities of our funding system. The use of bankruptcy will continue to be a common, necessary, and unavoidable administrative practice of arts management until we move away from our dysfunctional system of arts funding which is unique and isolated in the developed world. Under our system, no amount of planning will alleviate the need orchestras have for bankruptcy.

    • Sasha H says

      You mean dysfunctional system of arts budgeting.

      I have worked for two mid-sized arts NPOs in the last three years, an orchestra and a theater company. Both programmed their artistic product (and had me publicly announce that programming) before budgeting the production costs of that product. What’d they get? Sticker shock. In one case, one organization faced the impending deficit head on (last I knew, they had to have a board member loan the organization money interest-free to get through the winter). The other is back peddling, likely moving an expensive production to the following season and reprogramming a less expensive one.

      These organizations are not poorly managed organizations, in fact, one is headed by a mentor to many current managers in one specific NPO arts field. However, at least from my NPO management training in a community development and planning MA program, this is bad business practice and it seems to be the modus operandi of most arts NPOs. In my CDP program, we were taught not promise to deliver a multi-unit affordable housing unit, for example, unless we could balance the books with loans (that we had a plan to pay off), capital and low-risk “gap financing.” Certainly, there are greater moral and ethical risks when people don’t have housing versus a ballet to go to, but I think we need to take some fiscal responsibility for our artistic products.

  2. says

    What is obfuscated in the letter on structural deficits there is that what the orchestra is truly seeking relief from is its pension benefits and other contractual obligations. After all, bankruptcy doesn’t improve the ability of an organization to bring in more ticket revenue or donations. Arguably, it hurts such efforts. So what they want is to get out of paying as much to their retired artists.

    I’m not a fan of pensions to begin with as I believe that you should pay directly for work and provide services and benefit structures to help your employees invest wisely should they so choose (401k/403b plans, etc.). But it is unconscionable for an organization to shirk the contractual duties to its artists that it previously negotiated as a part of a guaranteed future for those artists.

    It’s one thing to change policy moving forward on how to handle retirement income vs. current wages. It’s wholly another to hide behind bankruptcy law when people are dependent on that income that was previously promised.

  3. Jim Undercofler says

    Diane, thanks for this thoughtful post. I fear that the full drama is yet to come, in that the Association has not revealed what they are asking of the court in regard to the musicians’ pension plans. Depending on the outcome of this item, we could see either a lockout or a strike. Either is possible. If the court rules against the Association, they will run out of cash soon and be forced to cease operations; and if the court rules against the musicans (by neutralizing their pensions), the musicians will very likely strike. JU

  4. TV says

    If a non-profit organization does not have an Executive Director, or at least a treasurer, who can explain the annual budget and the monthly financial reports (hopefully, all non-profit organizations have a monthly Board or Executive Committee and produce monthly financial YTD reports – ha!), then they are asking for trouble, and aren’t exercising their fiduciary duties.

    In my experience as an orchestra manager, many Trustees may understand the overall P&L statement and balance sheet, but they are unaware of the accounting line items that make it up, how they work, and how they are impacted. Therefore they look at big number categories like “Earned Revenue – Ticket Sales” and “Contributed Revenue – Individual Donations” without knowing about discount percentages, the pricing mix, factors which impact ticket sales, how individual donors are addressed and when, the underlying strategies, etc.

    The fact is that many non-profit executives are lousy at financial planning and reporting. That’s why a lot of organizations end up in trouble without the Board being aware of what happened. Orchestras, and indeed any non-profit organization that produces performances, are fairly complex businesses, and there are few good Board members around who understand the fundamentals. If is the job of the administrative staff to educate Board members as well as possible, to the extent it can be done.

    However, let us not ignore the fact, that the business model itself is an issue. You cannot have an organization with two CEOs, each responsible for a different aspect of the organization’s activities. This is the case in the U.S., where most orchestras separate executive responsibility between the Artistic and Executive Directors. This often creates divergent interests, and the end result is the Titanic with two captains heading towards an iceberg, with one captain shouting “starboard” and the other “port”.

    As far as tjhe Philadelphia SO and other organizations declaring bankruptcy being justified or not – well that depends. No Executive Director wants to be responsible for their organization folding. It’s not good for your career. However, Chapter 11 does make a lot of sense from a management point of view, especially in Philadelphia. You don’t want to run your endowment into the ground before pulling the emergency brake. In that sense, I feel Philadelphia SO’s management and Board have acted prudently, in spite of the understandable anger of the musicians and other creditors. The move is likely to save the orchestra’s endowment, which in turn will help the orchestra ending up in a Detroit SO predicament. Hopefully, Philadelphia musicians will stick to rhetoric and won’t make the mistake of striking.

    Finally, yes, it is extremely difficult to downsize cultural institutions such as orchestras. Boards may be willing to do so, but the musicians will usually be staunchly opposed to any pre-emptive steps, and will criticize management vehemently, whether it is management’s fault or not (to orchestra musicians, downturns could always have been handled better by management, regardless). The result is that management does all it can until facts become overwhelming to the point, where emergency measures are warranted. If you’re going to get denigrated by your employees, you might as well make sure that the cutbacks are substantial, and that a confrontational situation arises, where you can manoeuver the Board onto your side of the argument, so the musicians’ calls for your head seem self-serving.

    That’s the realpolitik of orchestras.

  5. says

    Diane is right (as usual) when she says something seems very odd, and inexplicable at times, about the relationship between bankruptcy and planning. And that is why the situation in Philadelphia continues to trouble me.

    Is it possible that a group of donors and the administration colluded in earmarking donations in a way they *knew* would break the pension fund? Did they orchestrate the bankruptcy with the intention of relieving the organization of its pension obligations? Why didn’t the administration tell donors the *obvious fact* that if they earmarked donations in certain ways it would bankrupt the orchestra? Or was that exactly the intention so that they could reorganize after eliminating the musicians pensions? This should be carefully investigated, and if laws were broken, Philadelphia’s District Attorney should be informed.

  6. says

    Since you welcome comments, may I offer one? One must go deeper by one layer in the case of the Philadelphia Orchestra as regarding who are the winners and who are the losers. The Philadephia board assigned the bankruptcy filing to the Philadelphia law firm of Dilworth, Paxon which has worked for the orchestra before. However, I do not know in what capacity. The law firm’s chairman is Joseph H. Jacovini who is a member of the Executive Committee of the orchestra’s board. His law firm has collected $361,000 for the bankruptcy work thus far. In a filing seeking approval to handle the case, a Dilworth lawyer, Lawrence G. McMichael, said Mr. Jacovini had no role in the preparation of the case, would not be privy to internal firm communications on the matter, and would receive no related fees. Mr. Jacovini also stayed aloof from the board’s decision to seek bankruptcy, and would continue to recuse himself from orchestra board discussions about the bankruptcy. Should the bankruptcy court accept the filing and approve the matter, Mrl. Jacovini will be in a “win-win” status. His firm will not only have profited in the matter but he shall not be personally held liable as a member of the board for any of the orchestra’s financial liabilities including $25,000,000 set aside for its pension fund. Even though Mr. Jacovini has declared his distance from the bankruptcy issue, I question whether his involvement even indirectly is not a conflict of interest which I believe is legally challengeable a situation that should be taken into serious consideration by the judge in the bankruptcy court.

    To another matter, and regarding TV’s comments, the musicians of the Philadelphia Orchestra have an agreement in which they are not allowed to strike.

  7. says

    TV makes many good points. Undoubtedly some of Philadelphia’s most successful business leaders are on that Board, and they didn’t stop this. They also didn’t stop bequests from being funneled directly to the operating budget instead of the endowment, which suggests that they had a very hard time indeed pulling the emergency break, or they were willfully ignorant of the risk of spending all but the permanently restricted corpus of the endowment. I don’t buy the willful ignorance conspiracy theory. Foresight does not always equal influence, and the Finance Committee of such an organization is always checking itself, for good reason, from getting too involved in programming decisions.

    But the deeper problem is actually pretty simple, and abiding, and bad news for the rest of us. Ticket revenues and contributions are volatile, and move downward simultaneously with recessions (so, too, do returns on the endowment). On the revenue side, when it rains, it pours. Expenses at top tier orchestras, however, are very stable. The vast majority of such an organization’s budget consist of union employment contracts. During bull markets, these costs, along with all others, increase rapidly as if the bull markets are permanent. And they never decline without catastrophic situations like those in Detroit and Philadelphia. And if you look at long-term averages, the costs increase at faster rates than ticket revenue. This puts more and more pressure on contributions, until the donors get fed up with pulling an increasing share of the weight.

    The cost structure of these large, heavily unionized arts organizations is stuck in a post-war boom time mentality, where constant expansion and growth and increase is perceived as our American birthright. The revenue structure, however, simply cannot be forced to adhere to this myth. The cost structure CAN be forced to adjust to the reality of volatile and slow-growing revenue streams, but only with considerable pain and bloody bloody fights.

    Finally, this whole problem is such a downer that nobody, not even the most foresighted Board members and administrators who see all this writing on the wall (it’s pretty plain, really), want to shut down the party while it’s still possible to squeeze out a few more good times.

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