An article was published today in the Detroit Free Press about the year-end fiscal situation at the Detroit Symphony, which had posted three consecutive years of balanced budgets – until this year. They were running an annual deficit for this year of $2 million, but managed to erase all but $190,000 for the end of year accounting. Pretty good, huh? No – not in the least.
This financial Hail Mary was accomplished by doing two things which are never a good idea. (1) By taking a one-time increased draw from income on the endowment (usually endowment boards are limited to taking a fixed percentage of the endowment’s earnings and applying that percentage to the yearly operating fund), and (2) by actually raiding the principal of the endowment by begging major donors who had earmarked donations for the endowment only to allow the association to move those funds (amounting to about $1 million) over to the operating budget.
Why are these two moves bad and worse? (Or as Keith Olberman would say, worse and worser). Because increasing your draw from the earnings of the endowment is a maneuver that can only be done a couple of times at most, because then you start eating into your principal – and it also implies that there is absolutely no new money that can be found in the community and that there’s no fat to be cut in the budget as it was originally drafted. Lame. Next, raiding the principal of your endowment is an order of magnitude worse – because you’re losing not only what you take out, but all potential earnings over the life of the endowment, which can amount to millions of dollars in the long-term, and you also reduce your yearly draw from the investment proceeds because the amount of principal to invest is smaller than in the previous period. As the article explains:
Raiding the endowment — the orchestra’s nest egg — to pay current bills is a dangerous practice because it can become addictive, sacrificing future stability for coping with the crisis of the moment. DSO president Anne Parsons said the action was warranted because Michigan’s deteriorating economic climate fueled shortfalls in fund-raising and earned income that led to a cash shortage. The DSO has contracts with its banks and commitments to donors to limit annual losses to less than 2% of its revenue.
Perhaps it’s understandable that with the orchestra facing an accumulated deficit ballooning from $1.8 million to $3.8 million in the space of a single season that such desperate measures were taken, but this comes during a year in which the association not only gave the musicians a raise (which they were long overdue, by the way), but also hired several new development personnel and added several new series. They raised a record amount of money this year ($14.6 million) but seemed not to take into account the additional $2 million in spending that they’d also taken on this season.
That’s why it’s increasingly difficult, from the viewpoint of the orchestral musician, to know what to take seriously in terms of what various managements tell us is happening in terms of fund raising. Every year seems to be a bad year, but then there are these various accounting maneuvers and ace-in-the-hole donors who rescue the outfits every year at the last minute. Money gets shuffled from one column to another, and you never really get a feel for what the true financial health of the organization is. There seems to be one set of numbers for the IRS, one for the corporate donors, and one for the musicians approaching with our hats in hand.
It’s laudable that the DSO didn’t try to balance the budget on the backs of its musicians, but they did take a new formula in how the pension would be calculated for hires after the end of last season, and it remains to be seen if the contract will be reopened and some of the recent gains withdrawn due to an extreme fiscal emergency.
I’m disgusted by all of this stuff – and both sides are at fault. Musicians push for more money without really knowing if a increased budget can be covered by increased fund raising. Managements give it to musicians without knowing the same thing – how smart is that?
The adage “if it sounds too good to be true – it is” still holds today – so why isn’t anyone heeding this sage advice?