A Question of Trust

Trust.

It is a difficult thing to talk about trust in the midst of an increasingly bitter labor dispute.  Obviously, at this point both sides are feeling a lack of trust, which is only to be expected.  I have no doubt both sides could assemble a lengthy list of betrayals large and small, each one backed up with lengthy justifications which may or may not be… well, justified.

But one recent exchange has jumped out at me as speaking to a larger point.  In this on-air debate, President Michael Henson of the Minnesota Orchestra asked Kevin Watkins from the musicians’ negotiating committee in effect, “We trust you to play your instruments, so why don’t you trust us to run the organization with solid financial leadership?”

Well, I hardly speak for Kevin or the musicians as a whole, but I can certainly explain why I don’t uncritically trust management’s word on the Orchestra’s finances.

1.  You hired a PR firm to report your financial position.  At a glance it may seem unfair to criticize you for hiring a PR firm to manage bad news—that is, after all, exactly why you hire a PR firm.  For similar reasons, you hire a lawyer to help you with a legal concern or a doctor to help with a medical concern.  But this goes far beyond massaging bad press; you hired this PR firm to dictate financial policy.  To refresh our memories, your board minutes reveal you wanted to end the past fiscal year with a deficit that would “prove” your need for a new business model and that the old way of doing things was coming apart.  So you consulted your PR firm to find just such a total, and withdrew a sum of money from the endowment that would result in just such a deficit—a shortfall of $6 million.

This deficit is entirely artificial, even contrived.  You could certainly have drawn down more, as you had been doing that for several years to “prove” you had a balanced budget.  Back then, you needed to make your finances look good because you were a candidate for state bonds, but now to make a case for organizational poverty you post a deficit in a pre-determined amount.  I get that other organizations did excessive draws during the recession, but that’s not the point here.  Also, we can argue about whether it was wise to have done these excessive draws in the past, or to have excessive draws in the future—but the fact remains that you altered your  profit and loss sheets not from purely financial considerations but as part of a deliberate attempt to enhance your position at the negotiating table.  So you’ll forgive me if I don’t uncritically trust your financial statements now.  What other “facts” been dictated by a PR firm? To what degree?

2. The 990s.  Board spokesman Doug Kelley has said in interviews that the musicians have the 990s—the tax documents the Orchestra must file with the IRS and make public every year as a non-profit.  He has gone on to state, more than once, that these documents are the “gold standard” for reviewing an organization’s financial health.  This is not entirely true.  Nor is an audit much better.  These documents are a snapshot in time, and hardly give a scope of an organization’s overall financial situation, and they inherently look backwards.  In personal terms, would you give a person a new credit card based on his or her last year’s tax returns?  Or a home improvement loan?  Or a mortgage?  Of course not—you would look at the family’s credit score, current employment, expected income, debt load, number of credit cards, car payments and so forth.  You would analyze their financial capacity right now, not just their personal ledger sheet from a year ago.  And so it goes for an organization.  The musicians are perfectly justified in requesting to see your assumptions, your projections and your aspirations.  What is the holistic view of where you think, realistically, the organization will be in a year?  Five years?  What are your priorities?  Your insistence that they base their response on the woefully inadequate 990 makes it seem that you are hiding something.

A secondary point also comes from Doug Kelley made on a previous appearance on Almanac: the statement that the administration should be trusted because no one lies on their tax returns.  This is an astonishing statement, really.  It seems almost embarrassing to point out that income tax evasion is a serious problem as old as taxation itself… one that has led to the creation of the IRS to enforce compliance with tax law.

3.  Questionable public testimony. When you testified before the state legislature to secure $14 million in state bonds, you were not entirely forthright about your finances.  I get that your testimony was not an outright lie, but you clearly presented yourself as being financially sound, and pointed to years of balanced budgets to support your claims of financial strength.  Yes, the legislators didn’t press you hard enough on your finances, but you gave an incomplete account of yourselves—it’s clear that you had been pulling extraordinary draws from the endowment to balance your budget.  You yourself freely claim that these amounts were unsustainable, and done primarily to create good optics for your presentation.  Is this legal?  I concede it is.  Was this politically astute?  Sure.  Was it effective?  Obviously.  But that doesn’t mean that outsiders observing the situation wouldn’t wonder if all your other financial statements—and your statements about finances—were not similarly  made up of spin, half-truths and political posturing.   As State Representative Jim Davnie (DFL-Minneapolis) said, “I can assure Mr. Henson that it is not just the musicians who have lost trust in the Minnesota Orchestra management.”

4.  Questionable data.  Another serious problem is the questionable bases of the few financial projections you’ve made public.  In your strategic plan, you base your future financial goals on the two specific years:  2008-2009.  You go on to make projections based on financial outlooks made during this same time, citing Giving USA as your source.  But those years represented the heart of the Great Recession, which hit non-profits—and specifically arts organization—particularly hard.  But things have changed.  The market is at record highs.  Giving USA notes that arts funding has fully recovered to pre-recession levels and continues to experience rapid growth.  As I spelled out in detail, other orchestras have experienced huge surges in ticket revenue and fundraising in the last few years.  But by all appearances you continue to base your forecasts on the grim reality of 2008-2009.  This doesn’t help your credibility.

5. Unclear definitions.  One ongoing point of contention is that in your analyses and projections you generally refer to “average” salary as a key metric.  This is odd—does any company think of salary in terms of a single average that ranges from the CEO to the mail clerk? How helpful would it be to look at an average of the salaries of all the staff members of Orchestra Hall, from Michael Henson down?  Think about it in personal terms: when you apply for a job, are you provided with an average salary for the company or the actual rate of pay for the specific position? It is the musicians’ base salary that is the critical metric here… the real-world rate that forms the basis of musicians’ salaries and dictates the overall payroll.  What is that figure? Worse, even though you repeatedly use “average” salary as a talking point, you haven’t released the formula for how such a number is calculated.  Forgive me, but this seems like more PR positioning.

6. Unanswered questions.  There are still areas of your financial reporting that raise questions.  All orchestra endowments took a hit in the 2008 recession, but the Minnesota Orchestra’s seemed to take a particularly brutal, disproportionate beating.  Why?  Documents show that the Minnesota Orchestra sold many securities at a $14 million loss in 2009 and hasn’t revealed what those securities were or how much they’re worth now. No other American orchestra saw a loss like this. Why?  The “independent” financial analysis you commissioned revealed that two very big ticket items, underfunded pensions and bond debt repayments of $9.3 million, weren’t addressed in your financial plans.  Why?

Let me point out one clear reason why it is not enough to uncritically trust management’s position is the cautionary tale of Minneapolis’ Southern Theater.

The Southern was widely seen as one of the most brilliant arts organizations in the Twin Cities, providing innovative original programming and serving as a home for a variety of smaller arts groups.  It’s annual budget topped $1 million.  It was supported by a range of donors and large foundations, including the prestigious McKnight Foundation, which in addition to regular support provided a large sum of money to the Southern to re-grant to the various artists and choreographers who performed there.  As an artistic leader in the community, its future looked bright, despite the hard times brought on by the 2008 recession.

Unfortunately, this was all a house of cards.

In 2011 the cards collapsed, and it was revealed that the organization was overleveraged and underfunded.  The Southern’s debt spiraled out of control; the organization had, in fact, been funneling McKnight’s pass-through grants—originally designed  for its clients—to pay for its own operating expenses, leaving the intended recipients without their money.  This development was all the more shocking because it was so unexpected… the Southern had been making rosy projections up until the final crisis.  Furious at the misuse of its funds, the McKnight Foundation demanded an immediate return of the $370,000 it had provided the Southern—funds which have not yet been repaid.  The scandal outraged the community and all other sources of funding dried up.  Within a week, the organization collapsed, and today the Southern exists solely as a rental space with one paid staff person.

Like the Orchestra, the Southern had a board of directors with managerial skill and personal resources.  Like the Orchestra, it filed 990s and submitted to annual audits, as required of all non-profits.  None of this made a difference.

In light of this situation, I’m sure you can understand why I think it wise to double check the management’s assertions… and its math.

Again, I say that trust often breaks down in a labor dispute—particularly one as long and ugly as this one.  But the above points show that this is more than a he-said-she-said debate… there are legitimate reasons why an outsider would not trust your financial positions.  And it isn’t just me saying this; nearly everyone observing this dispute has urged you to submit to an impartial, independent financial analysis.

I can’t speak to all the points of contention in this dispute, but I say with conviction that if you were to engage in an independent analysis, and to back up your assertions with independently verifiable data, many more people would be willing to trust you.  This really is an easy fix.

As Ronald Regan once said, “Trust—but verify.”

Xochipilli

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4 thoughts on “A Question of Trust

  1. The unusually high losses bear even more scrutiny with the presence of US Bank CEO Richard K. Davis on the MOA board, as well as Jon Campbell. You’d think that they’d be bending over backwards to explain, justify and cleanse any financial dealings of the merest hint of incompetent management or cover-up.
    But…no.

    Like

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