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

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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.

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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!

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.