Read the fine print

If you’ve already read this…I’ve revised my conclusion, adding some thoughts on why deficits can be a misleading measure of financial health.

Here are two headlines, from ArtsJournal links to recent news stories:

“SF Opera in the Black (After Major Deficits)” (San Francisco Chronicle, February 21)

“Cincinnati to Build on Recent Fiscal Success” (Cincinatti Enquirer, March 2).

Both these headlines make you think that the San Francisco Opera and the Cincinnati Symphony are in good financial shape. Granted, they’re a little sunnier than the headlines the two newspapers used: “S.F. Opera Finished Fiscal Year with Tiny Surplus” and “Symphony to Conduct Fund Drive.” But the stories themselves sound fairly sunny, as you can see from the first two paragraphs of each of them:

The San Francisco Opera finished its most recent fiscal year in the black, closing the books on the 2003-04 season with a tiny surplus of $27,000 on an operating budget of $54.6 million.

The result, contained in a recently concluded financial audit, marks a striking step forward after consecutive budget deficits of $7.7 million and $4. 4 million.

*

Starting with a clean financial slate this year, the Cincinnati Symphony Orchestra says it needs to find new revenue streams and plans to start a capital campaign sometime in 2005.

Greater Cincinnati’s biggest and richest arts group ended the last fiscal year Aug. 31 with no debt and an operating surplus of about $122,000 and expects to break even or post a small surplus this year and next year.

The Cincinnati story, it’s true, immediately goes on to present some bad news. The current surplus, it says,

came after a painful 2004, when [the Symphony] canceled shows including the holiday revue Home for the Holidays, raised ticket prices an average of 25 percent and negotiated a new contract with 99 musicians that included a two-year salary freeze. CSO administrators also had their salaries frozen for this year.

But things in fact seem to be worse than that, in both cities. To my eye, both stories — once you got past their headlines and their ledes – painted dire pictures, making me wonder whether the two organizations will have trouble surviving. (There’s also the possibility, of course, that the stories are inaccurate or incomplete. But I’ll proceed on the assumption that there isn’t anything crucial that’s incorrect or missing.)

San Francisco first. The story, reduced to its essentials, said that after posting deficits of $7.4 and $4.4 million in 2001-2002 and 2002-2003, the San Francisco Opera ended its 2003-2004 season with a small surplus. This surplus was due to two things:

– massive budget cuts (from $63.3 million in 2002-2003 down to $54.6 million in 2003-2004)

– and $10 million in what the opera company’s chief financial officer called “special transitional funding,” raised, the story said, in a concerted effort by the board — an effort that evidently won’t be repeated, because, as the chief financial officer told the newspaper, “these extra gifts will not be a regular feature of the budget.”

In plain English, then, the San Francisco Opera balanced its budget last season only because it raised $10 million that won’t be available in future years. So where will they find that $10 million for their next budget? Doesn’t the story plainly say that — even after massive cuts — the company is $10 million in the hole? Why didn’t the headline read, “S. F. Opera Faces $10 Million Budget Gap”?

(And adding to the problems is this: Ticket sales this fall, the story said, were soft.)

As for Cincinnati, yes, the Symphony ended its last fiscal year with a small surplus. And once again — as in San Francisco — there had been program cuts (along with wage freezes, which of course are themselves a kind of budget cut), along with special, one-time funding, in this case from “an anonymous donor [who] gave $1.6 million to wipe out two years of accumulated deficits.”

Laconically, the story tells us that the Symphony “says it needs to find new revenue streams.” What, I wonder, will these be? The orchestra will also start a “capital campaign” to rebuild its endowment, which was depleted when — in two previous seasons — more cash than usual was withdrawn, to meet current operating expenses.

Add it up. The Cincinnati Symphony can’t maintain the programming it used to do. (That’s getting worse; still more cuts, the story says, are projected for this year.) And even to continue in their diminished state, they need new revenue. On top of that, they need more endowment. And on top of that, they can’t freeze salaries forever. Is this a picture of a healthy institution? Sure, they’re not as troubled as they used to be, but what’s going to happen next? Will that same anonymous donor bail them out again, if they don’t find those fabled “new revenue streams,” and run more deficits? Why didn’t the headline read, “Orchestra Faces Uncertain Future”?

The moral: I might wonder why arts groups seem to get protected in the press. Surely a profit-making company would get asked harder questions. If it’s in financial trouble, wouldn’t the press say so?

But I think a crucial lesson here is in the danger of taking deficits as the measure of any group’s financial health. Deficits can come and go. An economic downtown might bring them on (and then an upturn might erase them). Groups might even incur a deficit on purpose, in much the same way that you or I might borrow money for a major purchase.

In itself, a deficit isn’t catastrophic. It simply imposes costs. If you borrow money to cover your red ink, you have to pay it back with interest. If you draw cash from your endowment, you have to raise new money to replace the cash you drew. If (like the Cincinnati Symphony) you find special, one-time donors to pay off your deficit, that takes time and energy you might have spent on something else. (And you might have trouble going back to these donors for things that might be closer to your heart.)

There’s also a PR cost — “The orchestra has a deficit!” The sky is falling! But now look at the advantage to an institution whose deficit is being watched. The size of a deficit, and even, within limits, its existence can be concealed with accounting tricks. So if you’ve been looking bad, it isn’t always all that difficult to make yourself look better. (Note: I’m not saying that the San Francisco Opera or the Cincinnati Symphony did this!)

And when, by fair means or foul, your deficit goes away, now you’ve won a victory. “SF Opera in the Black!” Intentionally or not, you’ve distracted people from any larger problems you might have.