There’s lots of chatter online about the Philadelphia Orchestra, and its board’s vote to file for protection and restructuring under Chapter 11 bankruptcy (here’s the actual filing). Of particular curiosity to many is how an organization with no debt and over $100 million in endowment goes broke. Their answer is that contractual constraints on their assets (endowment mostly) and contractual liabilities (employee pensions mostly) imbalance the math to the tune of $14.5 million for FY 2011, and probably more thereafter.
While much has been made of the big issues (the bellwether of a top-five orchestra going broke, the tension of union workers against management, and such), it’s the details of the bankruptcy filings that are particularly fascinating. Richard B. Worley, Chairman of the Board of The Philadelphia Orchestra Association, offers the play-by-play of the evolving train wreck as follows:
- Main season revenues fell from $9.9 million in FY 2008 to $8.1 million in FY 2010.
- In recent years, the organization has drawn from the endowment at a greater rate than industry standards (more than 5 to 5.5 percent) to help plug the deficit, extracting all of the unrestricted funds, and leaving only highly-restricted funds that support specific activities and are not available for general operations or other liabilities.
- The organization made a practice of using funds from incoming unrestricted bequests to support operations, rather than investing them.
- Costs have risen significantly over the past decade, from $31.3 million in FY 2000 to $43.6 million in FY 2010.
- Of that $12.3 million increase, $8.4 million directly relates to musician expenses, including salary, pension, health insurance, and other benefits (this despite significant concessions from the musician’s union for FY 2010 and FY 2011).
- $1.4 million of that increase is attributed to higher occupancy costs resulting from the move from Academy of Music to the Kimmel Center.
- The organization also faces (and this is likely the kicker) at least $44.8 million in unfunded pension liabilities from its currently contracted plans. Due to market declines and investment decisions, their frozen defined benefit plan for musicians and active defined benefit plan for staff are underfunded by about $21.8 million, requiring an annual $2.18 million cash payment (which doesn’t show up in current income statements under accounting rules).
- The organization is currently in legal dispute with its Pops concert partner, which they claim will run an $800,000 deficit in FY 2011, but which they are required to present with full financial responsibility.
And the list goes on (read section E in the filing for all the juicy details).
In short, seismic shifts in the environment led to an increasing disconnect between the Philadelphia Orchestra’s way of being and doing, and the support structures available to that model. The consequences and constraints of contracts (with donors and employees) negotiated decades ago made navigating that shifting environment nearly impossible. And all along the way, little choices that eased current problems but incurred future problems of greater scale laid the track even further away from the necessary destination.
So, what happens when an immovable object meets and unstoppable force? Philadelphia is providing the opportunity to watch and see. And, as a bonus, they’re offering everyone an opportunity to fund the experiment (and I must say, the “Listen with your heart” theme to that campaign is quite a brilliant deflection for those distracted by the evidence their other senses are providing about the organization).
So, at the risk of over-simplifying a very complex problem, it looks bad investments of pension fund money is the primary culprit here. I hope that this model isn’t presented by arts organizations across the country as a reason to stop funding artists’ benefits.
The business community often likes to blame the unions’ greed whenever they find themselves in financial trouble. But if GM had made cars people actually wanted to drive, maybe they would be able to fund all of their employee benefit costs.
We might note that orchestras under the European funding system are not having these sorts of draconian problems, and even though Europeans have many more fulltime, year-round orchestras and opera houses per capita than the USA. Some people will attribute the problems in the USA to high wages and pension costs (mostly in an anti-union stance,) but top orchestras in Europe have similar costs for top musicians. And in regional European orchestras, musicians are actually paid better than in the USA. (E.g., the New Mexico Symphony Orchestra just went bankrupt even though it only pays its tutti string players about 5k per year, and the solo-players about 15k.)
The real culprit is our funding system oriented around wealthy donors – a kind of neo-feudalism that is not used anywhere else in the developed world. Funding is unreliable, and management costs soar far higher than in Europe because the funding wheel in the USA has to be reinvented every year with large staffs in “development departments.” The institutions also become inordinately dependant on high-priced managers because of the precarious financial situation they constantly face. Arts management under the American system becomes problematized in ways that are simply ridiculous by international standards.
I am sure, however, that even with the collapse of the Philadelphia Orchestra, most Americans will still continue to deny or evade the obvious truth that our funding system by the wealthy is not only dysfunctional and ineffective, but in the end, even destructive. How unfortunate that our political climate is so retro, and that most Americans involved with the arts do not understand the necessity of developing a comprehensive public funding system like ALL other developed countries have long had. We will never be able to solve arts funding with ridiculous “business models” oriented around donations from the rich. At some point, maybe we can step out of the 19th century and into the 21st.
William, maybe your comments about an old fashioned US funding model are true. The difficulty will be to change it. The big donors don’t want it to change, since change would likely reduce their influence (they’d rather see bankruptcies than reduced influence). The USA gov’t isn’t going to fund the arts. Non-donors love that they don’t have to fund the arts but still get to enjoy them. True, now we are seeing failures, and maybe we’re at a turning point, but I just don’t see who is suddenly going to step up if the big donors aren’t enough.
All very true, Gary. I don’t see change coming either. I think Barbara Tuchman’s well-known book, “The March of Folly: from Troy to Vietnam” is helpful in this case. She examines how governments pursue policies contrary to their own interests in spite of the availability of feasible alternatives. Societies become so locked in illogical belief systems that they prefer their own destruction to change that would bring a better life to their citizens. Our dysfunctional arts funding system is only one small part of the web of folly in which America is entangled. For now, our best and only option is to try to raise awareness so that the light of reason might penetrate the senselessness. And believe me, letting an instruction like the Philadelphia Orchestra collapse is irrationality on a magnitude that should give every reasonable person pause. Will it cause at least a few people to wake up and notice how much better the Europeans deal with arts funding issues? That would be a beginning. Sadly, I think we will face even worse destruction before the turning point is reached.
Thanks, Andrew, for the illuminating article.
I wonder about Gary’s assertion that big donors obstruct change because they fear losing influence.
Doesn’t the fundraising success at the New World Symphony demonstrate that, with inspired leadership, donors embrace innovation?
Of course Europeans and all other developed countries take a non-USA position about other common, collective, national goods like health insurance, social welfare policy, under graduate education, climate change regulations, crime and punishment. As long as the USA (and increasingly GB and Canada) continues to promote the fundamentalist idea that each individual person is the same, grows up with the same opportunities, and must create their own private and “social” wealth, health, and culture if they expect to have any, all the organizations connected to those collective areas of life will continue to collapse. American “classical” arts organizations have to start opening their eyes to the larger political world in which they swim.