Once again I’m turning the floor over to Minneapolis non-profit professional Mary Schaefle… You can read Part I of her series on the Minnesota Orchestra’s finances here.
I’m back with another installment on Minnesota Orchestra finances. If you haven’t seen my first guest post, head on over to learn about the Minnesota Orchestra’s endowment.
The last post focused on the endowment. According to the Orchestra’s strategic plan, endowment/trust proceeds are one-third of their annual income. It’s time to turn to the other two legs of the stool, ticket sales and contributions.
Ticket Sales and Other Earned Income
Management lists declining ticket sales as a significant financial challenge. It’s true ticket revenue declined 8.3% when you compare the season ending in 2009 with 2011 (990, page 9 available on Guidestar).
Let’s turn to the words of Orchestra management to learn why that happened. In 2011, the change was “due primarily to a reduction in the number of concerts”. This refrain was repeated in the 2010 report, when a reduction in ticket revenue was attributed to “16 fewer concerts, a dropoff of 9 percent.” Mr. Henson went on to say decreasing the number of concerts was part of their financial strategy to control costs. Sure, decreasing the number of concerts means lower costs for ushers, box office staff, concession staff and many other things. But it also means lower revenue. If your financial strategy is to decrease costs through fewer concerts, but that same strategy also means decreasing revenue, do you really come out ahead?
Orchestra concerts are not the only events at Orchestra Hall. Decreases in other earned revenue, things like the Jazz series and hall rentals, were more than double the drop in classical tickets, by more than $1.3 million or 18%. We don’t know why those things decreased (interestingly, concessions showed an increase). But it makes me nervous that the new business strategy plans to broaden “program offerings to respond to customer interest.” If the plan does rely on income that has been dropping more rapidly than concert sales, major revisions are required.
You may remember my suggestion in the last article for an independent financial analysis. The questions I’m raising here wouldn’t be answered by that kind of oversight. A respected leader in performing arts management, preferably orchestra management, would be the best person to review the strategic plan to ensure it is sound.
Contributions and Grants
If you go to the Orchestra’s tax forms (after all, I have been harping on them), you’d see huge dollar amounts in contributions. Those figures are a combination of all donations, including the Hall renovation, the endowment, and other restricted funds. The Orchestra’s management is correct that they can’t divert money from the endowment or any other restricted fund to pay for this year’s season.
We see a steady increase in government grants (990, Part VIII). My guess is this is due in part to the Clean Water, Land and Legacy Amendment, though we should give credit where it’s due to the grant writing staff at the Orchestra. Competition for those funds has been fierce.
If we turn to the financial statements, we get more details about what is contributed for operating activities (translation- things such as musicians’ salaries and concert expenses). Again, grant income is strong. Current year grants double from 2009 to 2011 – impressive. Grants released from restriction ($$ received last year for programs this year) increased to a lesser degree. Grant writing staff deserve kudos for the $1.75 million they brought in. Before anyone starts questioning or speculating, no I don’t know the individuals doing the work. I don’t even know if the Orchestra has staff grant writers or if they hire a consultant as some nonprofits do. But I think we should give credit where it is due.
Contributions, on the other hand, didn’t fare as well. Remember we are focused on unrestricted donations for current operations, not any of the $$ for the Hall or the endowment. Unrestricted gifts decreased by close to $750,000 in three years, or almost 25%. I wondered whether focusing on the campaign would have a dampening effect on general, or annual, contributions. We can’t say for certain, but it’s tempting to think that the same effort for the Orchestra as a whole would have eased or erased the deficit.
Wrapping Up the Income Side of Things
We know that ticket sales have declined as a whole, but aren’t sure how much of that is due to the decrease in concerts. There could have been other factors. We know that hall rentals and non-classical concerts fell by even larger amounts.
Grant writing is a bright spot, but annual or unrestricted donations have decreased while the Orchestra was focused on the endowment and Hall renovation campaign. Again we don’t know if there were additional influences causing the decline.
I’ll be posting a #1A in the ”Minnesota Orchestra Financials Series” (never thought I’d see those words together). I asked a colleague who works as a nonprofit investment analyst to review my previous post. The one thing I can share now is the 5 year return on the endowment is within a reasonable range. That is reassuring. But it doesn’t answer what I consider the most significant question – why did the Board use only half of the 2011 draw for current operations, and how was the remaining $6.1 million spent? After I look at the Notes with my colleague’s help (did you know they have such a thing in Financial Statements?), I’ll provide an updated and/or corrected view on investments and my questions about the 2008 stock sales and the Orchestra’s portfolio.
After all these words about income and revenue, what do we know? Management’s statement that revenue has decreased is true. But I believe there are enough questions posed here that the Board needs to take another look at ways to increase revenue in addition to considering cuts. They need to take a good hard look at the Strategic Business Plan. Is it a “Vision for a Sound Future”? We all want the Minnesota Orchestra back on stage and performing. We need a plan that will get us there and keep us there.
Thank you, Mary! Mary will be in the comment section to answer any questions or comments you may have.