Category Archives: Not My Writing

What We Know About Minnesota Orchestra’s Finances – And What We Don’t, Part III

Once again, I’m turning the floor over to Mary Schaefle, our resident non-profit number cruncher…

***

If you’ve been following the financial posts, you know the previous posts focused on income – endowment and investments in Part I, and ticket sales and fundraising in Part II. It’s time to take a look at Minnesota Orchestra’s spending habits, or expenses. We’ll be able to review detail in some areas but will more often be looking at expenses grouped into categories.

The Big Picture – What Got Cut?

The nonprofit tax forms (990, available via Guidestar.org) categorize costs, allowing us to see what increased or decreased between 2009 and 2011. The single largest drop, $966,802, was in travel (Part IX, p10). 36% of costs cut by Orchestra management were the result of the calendar and lack of an international tour.

The second largest decrease is “other fees for service” at $742,701. Fees for service are payments to any organization or individual providing a service to the Orchestra, for example legal or audit fees. The “other” subset includes payments to a guest artist, to a soloists’ management company, and to the architect and project management company for the Hall renovation.

We can look at “other fees for service” in a different section of the 990 where the highest paid contractors (Part VII, p8) are listed. The types of organizations shifted from 2009 with more than half of the contracts paying guest artists to 2011 when 4 of 5 were related to Hall renovation and capital campaign contracts. From my point of view, what’s important about this shift is the decrease in guest artist fees. I’ve thoroughly enjoyed seeing Orchestra musicians as soloists, but I don’t know if or how the star power factor – or lack thereof – impacts ticket sales.

Going back to line items with the largest cuts, advertising and marketing came in third with a decrease of $579,655. We know management cut the number of concerts (see Part II), but I’m not sure that would have a proportional impact on advertising. You still have to print a season brochure, advertise concerts and so on. It could be a shift to online promotions versus paper. It could also be more obvious – a decrease in the volume of advertising.

The second and third cuts – guest artist fees and marketing – are troublesome to me. When you combine these with the decrease in number of concerts, it looks like a recipe for decreased income for the Orchestra. There may be other reasons for those changes. My previous posts suggested an outside expert review of the Strategic Business Plan, and this is one more reason for the review.

Who Gets Paid How Much?

Musician base salary is eighth among symphony orchestras (2011 data). My comparison shows Mr. Henson’s pay eighth among US symphony executives (2011 990 data), while Osmo Vänskä is seventh among music directors (McManus, 2010 data). Viewed through this lens, pay seems comparable between groups.

In response to the recession, musicians agreed to a one-year pay freeze contributing $4.5 million in savings to the Orchestra. In exchange, Mr. Henson and Maestro Vänskä agreed to 7% and 10% decreases in pay respectively. Their actual decreases were 3.5% and 4%. Executive contracts often include scheduled annual increases (just like the musicians’ contract) which would explain the difference. Two additional paid staff are included on the 990. COO Neu took a slightly larger decrease of 7.5%, while CFO Ebensteiner saw a substantial increase of 25.5%. Compensation of the most highly paid musicians is also listed. When viewed as a group, salaries and total compensation were flat. I chose to look at them as a group since pay fluctuates with solo appearances. This only includes five musicians, so can’t be considered definitive.

Neither the financial statements nor the tax forms split musician and administration costs, but we do know that 74% of the Orchestra’s costs are salary and benefits. Management has pointed to rising musician costs as a critical issue in their financial challenges. A Star-Tribune business columnist jumped on board writing “Orchestra’s Disease is Economic”. If you want to learn more about the argument that orchestras aren’t or can’t be efficient, I highly encourage you to read Drew McManus’ recent blog post on the topic – including the comments section. As someone who has worked in nonprofit service organizations for decades, I can tell you that employee costs are always a significant portion of the budget, and the conversations about how to control those costs never seem to go away.

So – Is There a Conclusion?

Frankly, the reason it has taken me so long to write Part III is my attempt to define a conclusion. I’ve stared at the numbers over and over, waiting for something to pop out. I’ve charted, analyzed, sliced and diced. Is it income? Is it expenses? Is there something else we could or should change? Is it a tweak or are dramatic changes needed?

I decided the answer is in the title. My guest posts were intended to shine some light on the facts of the financials, and I hope I’ve done that. In labor disputes – or really any dispute – figures and percentages are thrown around to prove and disprove points of view. They can be taken out of context. Financials are facts to me, and should be verified.

Although they are fact, the financials do represent something I believe is more important. They represent how an organization chooses to do its work. I ended the last post saying we needed to get the Minnesota Orchestra playing and keep them playing. After working through their financials, I’m convinced that is possible, and also convinced that an objective, outside view will help us get there.

***

Amen, Mary.

I hope you’ve enjoyed this series of posts as much as I have. They’ve been a fantastic little peep into how the Minnesota Orchestra operates behind-the-scenes. A round of applause and a brava for Mary is in order.

Please feel free to join Mary in the comment section. I’ll be there, too, once I digest the information in this post.

And MOA…we’re looking at you. Let’s get a dialogue going. We’re adults. We can handle it!

 

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The Musicians’ Letter from Japan

If you missed it, and especially if you’re disheartened, you really need to check this story out… Eriko Matsukawa from Japan is a huge Minnesota Orchestra fan, and she uses their work to battle the difficulties presented by her blindness and the trauma of the 2011 earthquake. She speaks for me when she writes:

So, that is why I am sending what little I could send. I know that this is not much, and regretfully, it does not help much. It is painfully frustrating to me this is all I can do. This amount does not translate my opinion on how much worth you are to me or respect and admiration I have toward you. It is just that, as an English teacher for adult students, translator and interpreter (English/Japanese), I do not make much, and please know that I know you are priceless.

Also, I do not consider this donation; this is a long-awaiting payment that I should have made, always wanted to make and you ought to receive. You are entitled to every penny.

You are asking for our help; it is amazing some fans do not realize that it is not us helping you, but it is you busting your back to help us and save us. You are so nice, so you don’t really say it that way.

The “little amount” she sent was $5000.

Perhaps this letter could be sent to every single member of the board. I would be beyond interested to hear their responses.

Today I give thanks that I live in a world moved so profoundly by music.

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Doug Kelley v. Tony Ross on Almanac

For those of you who haven’t caught it yet, Mr. Doug Kelley (of management) and Mr. Tony Ross (of the musicians) went at it on Almanac last night.

Here’s a link.

And here’s my transcript…

***

Eric Eskola: Concerned comments from the conductor; City Council action; editorials; votes of no confidence. A lot has happened in the past month when it comes to the ongoing labor dispute at the Minnesota Orchestra. Symphony musicians have been locked out by management for two months now; we thought it was time for both sides again to visit the couch. Doug Kelley sits on the orchestra’s management negotiating committee; representing the union is Tony Ross, principal cellist at the orchestra. Well, Mr. Ross, let me start with you. The independent audit that has been sort of at the center of this is due out next week. Will that get things off the dime here, or – ?

Tony Ross: No, we’re really looking for an independent financial analysis, not an audit that is produced by their side. There’s so many fuzzy numbers, numbers we don’t understand, that we need an independent joint analysis to be able to go further at all. And an audit just simply doesn’t do it. It looks backward. The analysis looks forward, looks at all kinds of things, as far as you know, management’s – the atmosphere of management, the workplace, the mission statement, the future of the band.

Cathy Wurzer: You’re still dealing with a structural budget problem, no matter how you slice it, correct? According to information from the Star Tribune, minutes of board meetings and that kind of thing, you’ve had the structural budget problem for a while. And from 2009 to 2011, there was no public mention of any trouble. So I’m wondering here. You opened the door to accusations that you misled the public, your donors, and lawmakers during that time.

Doug Kelley: Well, I’m glad you asked, because I’d like to put that to rest. We, like every other organization, we have income, and we have expenses. And they are certified by an outside accounting firm every year. And those numbers are given to the musicians. We file a tax return. Everybody knows you don’t lie on your tax return. And that’s given to the musicians every year. I think the dispute this week is about the budget and how that works. Let’s say we budget $8 million to come from the endowment, and at the end of the year the expenses are greater and we draw $10 million from the endowment. That number – every penny – is accounted for. It goes down, put on all the income tax return and everything else. It’s as transparent as you can be, and we have done that every year, and those numbers are public. The musicians have them. If they want to do a forward-thinking analysis, the first place they’d go would be to a certified financial statement or tax returns. Those are sort of the gold standard documents in financial analysis. And I think that the musicians should really kind of back off the accusation that we misled the legislature. We gave them every number and were totally transparent with them.

CW: However, Mr. Henson in January 2010, talking about bonding money in front of the committee said, “On the financial front, we have announced balanced budgets over the last three consecutive years. We are facing the current economic downturn with stability.” But that wasn’t the case.

DK: The orchestra’s 110 years old. It’ll be on for a long time after this dispute is over. But. So when you take that $10 million out of the endowment and you cover your expenses, you match income with expenses. That’s a balanced budget by anybody’s definition. And the other thing I think that’s a little exasperating is the musicians knew we were trying to figure out how to put the best face on it. We talked to the musicians about that. We shared those numbers with them as early as 2010.

TR: Yeah, I’d like to respond to that, if you don’t mind. And it’s true. They did talk to us, in a kind of clumsy attempt at negotiating ahead of time, with the entire group, I must say. Those numbers were still fuzzy. And when you read the last three years of minutes of board meetings, it is really appalling. It’s appalling that they want to represent balanced budgets to make it look good for the legislature, make it look good for the donors, and also they specifically state, let’s plan to have a deficit when we’re negotiating with musicians. This will help us. How can we have trust in that, Doug? How is it possible for us to have trust in you, to have trust in Michael Henson when we hear the tape of him bragging to the legislature about three years of balanced budgets in a row, and then sock it to the musicians, because really we’ve been in the dumps for three years, but we just didn’t tell anybody else. The numbers you guys showed us at those meetings are interesting. The first meeting we had, I think Michael Henson said that, well, this is all planned on the new high of the Dow being seven to eight thousand. Obviously, that’s simply not true. So there’s so many questions. It’s not – We love our board. We love our volunteers. We know they’re there for us. The kind of proposals you have on the table will turn this orchestra into a minor league band. Period.

CW: I want to hear a response here from Mr. Kelley.

DK: Yeah, let me just say, what happened in between the time before and now in how we report these numbers is the recession. The musicians have been shielded from the recession. You had a 25% increase from 2007 to 2012. And you remember that first big meeting – I think you were just referring to it – Richard Davis and Michael Henson came in front of you and told you exactly what they were doing. They said, “You know, we have reported that we have balanced the budget and we have announced that publicly. And we’re also telling you that we’re about a million five short and we’ve done that because of donors. And you guys knew every bit about that, and that’s why I think it’s so disingenuous to go to the legislature. But now the thing that happened was the recession, and the recession went, we predicted that the endowment would be $230 million. It’s $130 million. Contributions dropped off a cliff. That’s what changed. And that’s why – and not only our orchestra, but orchestras across the country have been saying, we cannot keep kicking the can down the road. We have to balance these budgets and we have to have a sustainable model.

CW: Mr. Ross. Response?

TR: Well, I can’t disagree with having a sustainable model, especially a sustainable artistic model. And we have to live in the real world. Orchestras across the country – this is not true. I’m sorry. There are three orchestras, maybe two, that you’re referring to. When I read the minutes of the meeting, the board obsessed about Detroit. Are we equivalent to the Detroit orchestra? I don’t think so.

CW: You said “live in the real world.” May I ask this…other businesses across the country – other orchestras, musicians have taken pay cuts. Aren’t you going to have to take a shave here somewhere along the line?

TR: That’s a fallacy. Some have taken cuts. Some are going along – our peer orchestras of Cleveland, National, the two California orchestras, New York Phil, Chicago, have all taken modest pay raises. Our equivalent orchestra – the closest orchestra to us is the Cleveland orchestra, which has, in my opinion, not the level of – it’s not thriving, like Minneapolis, the town of Cleveland. And so there are…if we want to look down, if we want to look at the failing orchestras, and model ourselves after them, yeah, we should take big cuts. I don’t want to do that. I want to look up. This orchestra is world-class; it plays better than any orchestra in the world right now; and it’s on the precipice – another cliff, and we will fall and become minor-league very soon if this doesn’t get settled.

CW: The musicians say, Doug Kelly, that they do not have confidence in Mr. Henson. Has the board voted – has the board discussed Mr. Henson? Do you have full confidence in him?

DK: Yes, we do. Absolutely. And we just – we had a committee meeting to discuss Mr. Henson. Mr. Henson has the unanimous full support of the board. I think the reason the musicians have been unhappy with Mr. Henson is because when he first came, he said you have this structural deficit, it is here, you need to address it, and he started to address it, and that makes everybody nervous when you start doing that, and to put it on a sustainable basis, is going to take some real changes.

CW: Tony Ross.

TR: This is nothing new to us. I’ve been in negotiations here for twenty years. I’ve been in the orchestra for twenty-four; it’s my twenty-fifth season. We’ve always had this same discussion about financial sustainability and deficits. The reason we have no confidence in Michael Henson is his ability to tell different parties different things. We feel it’s totally disingenuous on his part. From three years ago, today he and our top manager have made the most toxic work environment you can imagine. This is a non-profit artistic organization. We have 95 artists that are coming here trying to do the best job we can every year, and we’re getting threatened by our managers and our HR department on a daily and a weekly basis. Never in my thirty years in this business could I have imagined something like this.

EE: How’s this going to get settled?

DK: You know what? I hope that instead of going off on these frolic and detours, we just come back to the table and help us settle and solve this problem. They – we made an offer in April, and they have not made a counter to this date.

TR: We made counters, and if you want us to make a more detailed counter, we need that financial analysis. And I’d like to ask you, Doug: what are you afraid of?

DK: We’re not afraid of anything –

TR: Well, let’s have it!

DK: We have opened our books up totally. We don’t need to take another frolic and detour into something that won’t help any –

TR: Can I say an example that makes me say that?

EE: Real quick.

TR: For once in the minutes it says, and there’s very few times they speak of this, there’s a gift of half a million dollars. And the board says, what should we do with it? It was given to the orchestra. Well, ten percent of it goes to operations. And ninety percent of it goes to the building fund – the lobby part of the building fund. These are gifts given to the orchestra. We the players are the orchestra. We make the sound. This is why this orchestra has its reputation. It’s not because we put a fancy lobby on.

DK: Nobody on the board comes to this with any enthusiasm. We come with heavy hearts, but we cannot go on. The endowment will be depleted in five years if we can’t keep drawing on it.

EE: Thank you both for coming. Hope it works out.

***

Well, I’m going back to delaying and frolicking now…

https://i2.wp.com/uploads5.wikipaintings.org/images/jean-auguste-dominique-ingres/the-golden-age.jpg

A visual representation of what this blog is all about, according to Doug Kelley

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Mr. Henson Goes to St. Paul, Part I

From the Star Tribune website

The locked-out musicians of the Minnesota Orchestra issued a unanimous vote of no confidence in the organization’s president and CEO, Michael Henson, on Tuesday.

Here’s a GIF of my reaction to this news:

You can read a list of objections the musicians have to Mr. Henson on their website. Their first is that he misled “the Minnesota Legislature about the orchestra’s finances during his testimony in favor of the orchestra’s bonding request.” There they linked to an mp3 of Mr. Henson testifying before the Cultural and Outdoor Resources Finance Division of the Minnesota House of Representatives in January 2010…and misleading, if not lying, to them. Here’s a link to the mp3. The segment having to do with the Minnesota Orchestra begins at 2:38:55. In the interest of context and thoroughness, and for future reference, I’m transcribing the entirety of Mr. Henson’s appearance here. Apologies at its length, but…it’s long! They always say that lawmaking is like sausage-making: people don’t like knowing how either is made. Well, here’s your chance to watch some sausage-making, up close and personal… If you’re anything like me, the process will make you a little queasy.

***

Here are the cast of characters (listed in order of appearance), their initials, their political party, and their title at the meeting (if applicable). Information courtesy of this page and quick Google searches…

Mary Murphy (MM), DFL, Chair of meeting

Margaret Kelliher (MK), DFL, then Speaker of the Minnesota House of Representatives

Michael Henson (MH), President and CEO, Minnesota Orchestra

Greg Davids (GD), Republican, Lead of meeting (he is referenced by Margaret Kelliher; he does not actually speak)

Lyndon Carlson (LC), DFL, ex-officio

Alice Hausman (AH), DFL

Dean Urdahl (DU), Republican

Diane Loeffler (DL), DFL

***

MM: Rep. Kelliher, 2528.

MK: Madame Chair and Committee members, thank you for your work; I’ve been watching you, and you have a lot of good projects in front of you. I could say something very nice about every single thing I’ve seen. I just hope that Rep. Davids and I don’t have to team up like we had to in my first term in the legislature this year to make some of these things happen. So I really appreciate your hearing a couple of bills today. We’re first here to present our bill on the Orchestra – the Minnesota Orchestra, and Orchestra Hall and Peavey Plaza. And so I’m going to be brief about this; I want to tell you just a couple of things about the Orchestra. The Orchestra was formed in 1903, and since 1907 there have been 680 concerts in 60 communities around the state. There’s a wonderful packet that they’ve put together for all of you, including the impact on your own districts of the Orchestra. But I do love this quote by a Tyler resident, who had only seen the Orchestra once as a young boy. “On Friday night he was hearing the Minnesota Orchestra perform as a whole new experience. ‘It’s a pretty nice deal,’ he said, ‘getting something like this out here.'” He was quoted in the weekender Independent in Marshall, Minnesota, in February 2008. So the Orchestra has a broad scope and reach. Over 80,000 students are served by educational programs by the Orchestra every year. It performs over 200 concerts. And Orchestra Hall has hosted ten million visitors since 1974. And that’s our topic today. This renovation of Orchestra Hall and Peavey Plaza is job-intensive. Over 900 jobs will be created with this little bit of state money, partnered with a lot of private money. This Orchestra is also one of our state’s great cultural exports. The Orchestra has been winning terrific acclaim all around the globe, including the London Daily Telegraph, as well as the New York Times. And you can also know the reach of this Orchestra by the fact that it’s one of the only – it is the only American orchestra with a regular broadcast on the BBC. I think that’s pretty amazing, Madame Chair, and members. And I have to tell you just a quick personal story. My own children got to participate in something very special through our church a few years ago, and it was the production of the oratorio that had been commissioned. And it was an oratorio that the music of course was played by the Minnesota Orchestra. And the singers came from a large pool of singers, including children from the Basilica of St. Mary. They had an amazing experience, being able to record that piece – the first recording of it ever, in Orchestra Hall, by a Swedish company that came in and did that with a Swedish production company. And it has had an amazing and profound impact. The oratorio itself was about the impact – it was actually commissioned by our priest at the time, Father Michael O’Connell – and the story was the story of the children of the Holocaust. And my own children, when they sang in that production, said, “Oh, Mom.” I mean, you could just imagine the terrifying thing that was happening to those children at that time. So I think for me, what music connects, and what a project like this connects, for people, for children, for adults, all across the state, is how music tells the story of people’s lives, whether that story was a long time ago, or that story is today. And so I’m pleased to introduce to you the President and the CEO of the Minnesota Orchestra, Michael Henson.

MM: Welcome, Mr. Henson.

MH: Thank you very much, Madame Chair, and Representatives, and what a great pleasure it is to be here today, and thank you, Speaker Kelliher, for such an eloquent presentation. I’d like to begin by sharing a bit more background on the Minnesota Orchestra with you, and then to update you on the substantial progress we’ve made on our building project since we appeared at the Capitol in 2008, requesting planning funds for the renovation of Orchestra Hall. I joined the Minnesota Orchestra just over two years ago, coming from England, and one of the factors that drew me here was the Orchestra’s reputation. It is one of the top orchestras in the world. The Minnesota Orchestra was founded in 1903, as Speaker Kelliher mentioned. It started touring the state only four years later, and has continued to do so ever since, traveling to every corner of the state. We began our education concerts in 1911 and they continue to this day, too. Today the Minnesota Orchestra performs nearly 200 concerts a year, reaching over 400,000 people, 200,000 additional individuals across the state weekly hear our radio broadcasts, and millions across the country through national and international radio broadcasts. On the financial front, we have announced balanced budgets over the last three consecutive years, and we are facing the current economic downturn with stability. In general, the orchestra is musically enjoying a Golden Period with music director Osmo Vänskä. And we are excited about the many possibilities surrounding our hall renovation. Let me detail the project very briefly. I have to say that I found this project to be an extremely captivating one since the first moment I visited Orchestra Hall. I was struck then by the tremendous potential of a revitalized Orchestra Hall in this community. Since I joined the Orchestra, we have tested and re-scaled the scope of the hall project in light of the very challenging economy. The result is a very focused and feasible project. Our vision for an expanded Orchestra Hall is a $40 million renovation that re-invents our public spaces, better serves our young audiences, and makes certain that Orchestra Hall lives up to its full potential as a beacon in the city, accessible to all in the community. Our general contractor estimates that the project will create nearly 900 jobs. Orchestra Hall was built in 1974 for approximately $15 million. The bulk of these resources were put into the auditorium, which still functions very well. The lobby, on the other hand, was built to last only fifteen to twenty years. We have three priorities in our renovation, and the top amongst these is an improved lobby. The second is to modernize our auditorium. And last, but not least, we have started to regenerate Peavey Plaza in the Orchestra Hall renovation. We believe that the reinvention of this entire city block will have a powerful social and economic impact on our community. I’d like to note that the $40 million figure relates only to the cost of renovating Orchestra Hall, not Peavey Plaza. We are currently working with the City to determine the appropriate costs for the renovation of Peavey. Our private fundraising efforts are going very well, but public funding is critical if we are to reach our ultimate goal. Our private donors are keen to hear that the state is a partner in our project. I thank you in advance for your support of our plans to re-imagine our hall and Peavey Plaza for our new audiences in this century. Thank you very much.

MM: So Rep. Kelliher, was the orchestra heard on BBC before Mr. Henson came to Minneapolis?

[laughter]

MH: I’ve had a close working relationship with the BBC for twenty years. That has obviously helped; however, we have a world-class orchestra and if we were not a world-class orchestra, we would not be appearing on the BBC. So I think there is a very good synergy between a world-class orchestra and another world-class broadcaster.

MM: Good answer. Very good. Rep. Carlson.

LC: As ticket holders, my wife and I might be interested in where will we be attending during the construction period?

MH: I think in the construction period we actually looked at a variety of options. One was to close the hall over a three year period – six months each year. What we decided to do is to close the hall for one season, and we are currently in advanced stages of negotiating where we’re going to appear in the downtown. We’re aiming to maintain the vast majority of that orchestral series, and the object has to be to actually retain that audience, so that when we close the hall and reopen it in a year’s time, we have retained as much of that audience as possible and retained that enthusiasm. So hopefully in the next couple of months we will be announcing that, and we are trying to minimize the amount of disruption.

LC: So the main point is that you’re still going to perform.

MM: Maybe in Duluth. [laughter and chatter]

LC: He never said which downtown.

MH: If I could also supplement that, we’re also aiming to increase our state touring for that year as well. And we’ll be looking at between two to four weeks of activity. So I think we’re going to see a smaller main season, but we’re also going to take that in terms of increasing our presence across the whole state.

MM: Representative Hausman.

AH: Thank you, Madame Chair. I believe it is this weekend we have the opportunity to hear the Minnesota Orchestra performing together with the St. Paul Chamber Orchestra, and as the newspaper account says, those conductors who have international experience had really great things to say about the quality of the musical experience we have available in this state.

MH: That’s extremely pleasing to hear, and I know the orchestras are working as we speak at the moment, and I think it is going to be a truly splendid series of concerts.

MM: Representative Urdahl.

DU: Thank you, Madame Chair. Mr. Henson. I have had occasion a couple of times to attend the performances at the [?] Performing Arts Center, and enjoyed that, particularly with my Finlander wife and Mr. Vänskä. But if you’re looking for a home, you know, I’m sure that a good deal could be struck with the [?] Performing Arts Center. [Editor’s Note: I can’t make out which performing arts center Rep. Urdahl is referring to! Please listen to the mp3 yourself to judge and leave your ideas in the comment section. His comments are at 2:50:05. I’ll edit this entry if I get any clarification…]

MK: What a generous offer, Rep. Urdahl.

MH: Thank you very much.

MM: Rep. Loeffler.

DL: Thank you, Madame Chair. And Mr. Henson, I’d like to put something on your short list of alternative locations. Just about two miles north of where you are is the original home of the Minneapolis Orchestra, which became the Minnesota Orchestra, at least it did all of its original recordings in the Edison High School Auditorium, which had perfect acoustics. I don’t think they’ve changed that much since then, and it’s in the official arts district of the city, and you’ve never toured to our area, so I think coming back home and maybe re-playing some of those wonderful classics that were done and recorded there would really be a really interesting thing, to tour within – for your home city and back to something that is the historical roots of the Orchestra.

MH: Thank you very much for that very helpful suggestion.

MK: Madame Chair, I feel like we’re being lobbied as much as we’re lobbying all of you today.

[laughter]

MM: Any other suggestions for their off-season? [laughter] Thank you very much.

***

I’ll have more thoughts on this transcription later. If you have any corrections to my transcription, let me know.

In the meantime, what are your thoughts?

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Two Approaches to Governance…indeed

I’ll just leave this here…

From the League of American Orchestras’ 2011 conference schedule

Two Approaches to Governance

The Minnesota Orchestra and The Saint Paul Chamber Orchestra are both very successful institutions, offering strong programs to their communities in differentiated ways. Both are characterized by high-functioning boards, and, like their orchestras overall, their approaches to governance are distinct from one another. They exemplify two very different approaches to governance, and both styles are represented throughout our industry. This session will offer two views of governance, exploring what works about each, and what challenges and opportunities are embedded in each approach.

Michael Henson, president & CEO, Minnesota Orchestra; Jon Campbell, chair elect, Minnesota Orchestra; Sarah Lutman, president & managing director, The Saint Paul Chamber Orchestra; Dobson West, board chair, The Saint Paul Chamber Orchestra

Moderator: Sally Sterling, consultant, Spencer Stuart

Pity time-travel isn’t possible. Because I’d love to attend this session and learn how high-functioning boards operate, and see what challenges and opportunities are embedded in each orchestra’s approach.

(The Minnesota Orchestra’s Michael Henson, president and CEO, and Osmo Vänskä, music director, invite you to join them at Conference 2011)

I see the “Minneapolis is easy to get around” talking point had its origins many months ago.

***

(And yes, I have some opinions on today’s rather explosive front page Strib story. But they’re not quite yet ready for public consumption. Hold your horses. In the meantime though I found this and thought, especially in light of today’s revelations, that it was…interesting, shall we say, in hindsight.)

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MinnPost Editorial by Paula and Cy DeCosse

As the Orchestral Apocalypse drags on, many readers have wondered what important donors are feeling about now. We have our first indication in this MinnPost editorial, “We’re locked out, too: Questions for MN Orchestra management,” by Paula and Cy DeCosse.

Their editorial begins:

The recent announcement of additional Minnesota Orchestra concert cancellations only deepened the gloom of hundreds of Twin Cities patrons and music lovers. We’ve already missed six weeks of concerts, and now the holiday concerts have been canceled as well. Orchestra Hall is under construction; the Convention Center auditorium is dark. The musicians are locked out – and so are we!

As the conflict has dragged on, with letters from the board citing unsustainable deficits and musicians protesting a 30-50 percent pay cut (management says the cuts would be 20-40 percent), we in the community are trying to make sense of it all. We have a lot of questions.

The whole thing is highly recommended reading. It covers several of the most important questions we’ve been asking here, calmly, succinctly, and persuasively. (And for what it’s worth, to the best of my knowledge, this is the first mainstream press mention of the “winning” article.)

Mr. and Mrs. DeCosse were one of the sixteen donor couples profiled on the Orchestra’s website. In light of their editorial today, if you click the link and the page is gone, I have screenshots I can share.

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New Information on the Minnesota Musicians’ Website

For anyone interested, the musicians have just released some interesting informational reading on their website, including answers to such questions as “Why haven’t the musicians made a formal counteroffer?” and “What is the difference between a joint independent financial analysis and audit reports?”

We’ll have to wait to see what management says in response to the questions raised here, but in the meantime we’ve got a lot to mull over… Here are some of the paragraphs that stood out to me:

Audits do not cover an institution’s viability, stability, business plan, strategic plan, the quality of its management, comparative performance, or present and future prospects. A joint, independent financial analysis would review all of these things, and would assess current and future trends, opportunities and risks…

In effect, management is asking its musicians to make an “investment” of $5M annually in concessions, without permitting the kind of financial analysis any rational investor or lender would require…

Jon Campbell, the Chairman of MOA’s board, admitted he had been “wrong” at the time of MOA’s last major projections (part of the 2007 contract negotiations). He jokingly refers to the fact that the musicians must be wondering “what he was smoking.” He was “wrong” by $100M. This past performance raises natural questions about current projections…

You may be interested to know that the Minnesota Orchestral Association has hired the same law firm responsible for the St. Paul Chamber Orchestra lockout, as well as the American Crystal Sugar lockout mentioned in the article linked above…

And they also came out and said what so many of my readers have been saying from day one:

We have been through many tough yet productive contract negotiations over the years. This is different. This is ideology-driven.

Election Day may be over, but it appears the political battles in Minnesota have only just begun.

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What We Know About Minnesota Orchestra’s Finances – And What We Don’t, Part II

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.

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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.

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Here is Part 3

Thank you, Mary! Mary will be in the comment section to answer any questions or comments you may have.

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Lame

I’m just going to leave this here. It speaks for itself. From the Star Tribune

Thursday’s cancellations will have consequences beyond the orchestra.

The Minneapolis Convention Center had projected income of $274,000 from the fall and holiday orchestra seasons, said spokeswoman Kirsten Montag. And the Minnesota Chorale, which had been scheduled for dates with the orchestra in October, November and December, will lose nearly all of its earned income for the fiscal year, said executive director Bob Peskin.

“We’ll have to make up the lost income with further expense cuts and increased donations,” Peskin said.

Orchestra president and CEO Michael Henson said the December dates — which include classical, jazz and presentations in addition to the holiday fare — were projected to make up 19.3 percent of annual ticket revenue. However, the net impact is a wash because the orchestra won’t have to pay rent at the Convention Center or musician salaries and benefits.

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What We Know About Minnesota Orchestra’s Finances – and What We Don’t, Part I

There is an old stereotype that artists are terrible with numbers. Many enforce the stereotype (me, for instance), while others defy it. Happily, Mary Schaefle defies it, and she is today’s guest blogger!

Mary is a Twin Cities nonprofit professional and community violinist. You may have seen her name in the comment section here at SOTL, on Facebook, or on the Musicians of the Minnesota Orchestra’s website. I highly recommend reading the two letters she sent to Minnesota Orchestra management; you can find those here and here. I’ve been staying away from too much in-depth analysis of numbers, because I obviously don’t know much about non-profit nitty-gritty. Happily, however, Mary does, and she offered to take a look at some of the public documents discussing the Orchestra’s finances, so that we might at least try to figure some of this stuff out on our own. Hey, if management isn’t going to answer our questions, what else are we supposed to do?

You can take a look at some of the forms she refers to online. Unfortunately I can’t link directly to them, but if you sign up for a free account with Guidestar, and look up the Minnesota Orchestral Association, you can download some of the documents she mentions. If you have any questions or refutations to make, the comment section is open, and Mary will answer you directly, and I will edit the original article as needed. How’s that for service? I’d be so delighted if management would do the same for us, but for some reason that’s too much to ask… Anyway. Many thanks to Mary for contributing such an interesting piece. I hope we get some answers to the questions she raises, and soon.

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Minnesota Orchestra’s management has told us they are making “difficult and necessary decisions” and can only spend what they earn. So what do we know about the Minnesota Orchestra’s finances? Tax returns and audited financial statements give us some answers, but unfortunately more questions. There will be plenty of numbers in this post, but I’ll try my best to explain terms.

Remember that I’m not an accountant and certainly not a CPA. I am a person who cares deeply about the Minnesota Orchestra, and who likes to dig through nonprofit tax returns and financials. They can tell you a lot about the organization as long as you have a lot of time and either a translator or a basic understanding of nonprofit finance.

Endowment Income – Is That the Problem?

Management has pointed to the 2008 recession and the resulting decrease in endowment revenue as a key problem. The Orchestra’s endowment lost $12.9 million that year (reported on the 2008-2009 tax forms which are available at Guidestar). They’ve since experienced modest gains of $6.3 and $5.6 million (990, Schedule D, Part V).

But endowment challenges are much larger than a one-time decrease in size. Organizations assume they will receive a certain amount of income from the endowment each year. Those estimates can be conservative, assuming smaller returns, or they can be wildly optimistic. Looking at the Orchestra’s strategic plan, those 2008-09 investments were projected to be $201.4 million. The actual assets were $135.3 million, a difference of $52.2 million before the market tanked. The $12.9 million loss was piled on top of that. The 2007 projections are somewhere between overly optimistic, flawed, and just plain wrong. Perhaps this was the genesis of the financial problems.

Let’s get to how that impacts us today. Back in 2009, our endowment “paycheck” was lowered by 13% compared to our projections. Then things got even worse and our 2012 “paycheck” is expected to be 45% lower. They know the 2007 projections are wrong, but just keep using them. Why do they appear in the 2011 Strategic Plan? Do management and the Board have a new set of projections for future years? A review by an investment analyst, which is typically not part of an audit, is needed.

The Endowment Draw and Two More Questions

Comparing tax returns to media statements and the Minnesota Orchestra website raises two more questions. The draw on the endowment (the income or “paycheck” I mentioned above) has been excessive according to management. They are correct that a 19% draw could deplete the endowment in just over five years. That one is simple math.

According to our friend the 990, the endowment distributions (read “draw”) were 16.3%, 9.4% and 7.8% from 2008-09 through 2010-11 (Schedule D, Part V). As I pointed out in the comments section of Emily’s earlier post on the endowment, the draw amounts released by Minnesota Orchestra do not match their tax forms. That means percentages are off as well. Yes, we once again need that accountant.

Now onto an item that – at least for me – is really troubling. Audited financial statements list “Board Designated Draws from Investments” in the Statement of Operating Activities. Think of this as the amount taken from the endowment (draw) to support concerts, education programs and the day-to-day business of an orchestra (operating activities). In 2008-09 and 2009-10, amounts reported on the financial statements are fairly close to those on tax forms.

But the difference in 2010-11 is just over $6 million. You read that right. The Board withdrew $12.1 million from the endowment, but only $6 million was used to run the Orchestra. I’ve scoured the financial statements and don’t know where the remaining $6.1 million was spent. The money was used somewhere – but where? Financing long-term debt? Expenses related to the Hall renovation? Why did the Board and management decide to withdraw such a large amount in 2011 and only use half for the operations of the Orchestra?

Now is a great time to reiterate that I’m not a CPA. A clarification from an accountant would be wonderful. Perhaps closer to necessary.

For those who like to verify my figures, unfortunately the audited financial statements are not available on the Orchestra’s website or on Guidestar. I’d suggest requesting a copy from the Minnesota Orchestra.

Turning To Investments

Minnesota Orchestra owns plenty of stock. In the 2010-11 and 2009-10 years, Minnesota Orchestra reported gains (or income) of $7.8 million and $2.8 million when they sold securities (Form 990, part VIII). We don’t exactly know how that income was used, but I think we can all agree that bringing in more money is a good thing.

Unfortunately, 2008-09 is again the spoiler. The Orchestra sold a large amount of stock at a $13.9 million loss. It is well known advice to buy stocks low and sell high, and the 2008 market was low as a contrabassoon. It’s possible the stock was on its way to becoming a penny stock. But why would they own such a volatile, risky stock? It could be a bad decision or bad investment advice – to the tune of almost $14 million. I know you’re ready with my next line. A review by an investment analyst would certainly help explain some things.

The Wrap-Up…And More Numbers Coming

For those who’ve stuck with me through this post, you might wonder why I spent so much time and effort on the endowment. It’s because the Orchestra’s management emphasized the shrinking endowment as a key factor in sending their books into the red. So far we’ve confirmed the endowment decreased during the recession. But we’ve also looked at faulty estimates, endowment draws not matching tax returns, some bad investment advice, and an endowment draw where only half the funds go to the work of the Orchestra. If you came here for answers…well hopefully the title gave you a hint.

There are other problems cited by management, including declining ticket revenue, musicians’ salaries, and donors’ restrictions on their gifts. But that means digging into the financials, tax forms and media statements again. Trying to digest too many numbers at once jumbles everything for me, so I’m going with manageable chunks. Check in later for the current state of Orchestral Apocalypse (thank you, Emily, for what you’ve been doing!) and for a few more facts and figures.

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You’re welcome, Mary, and thank you!

So…what do you think? I’m in absolutely no position to judge; this kind of stuff is way beyond my personal sphere of expertise. (I do, however, trust Mary.) Are there any experts out there who can help to shed some light on what’s going on? Have any other patrons been looking at the documents that Mary references? If so, what did you find? Now would certainly be an excellent time to hear directly from the MOA…

You can read Part II of Mary’s series here.

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