Stewards of the Endowment?

In today’s edition of the Star Tribune, Minnesota Orchestra board member Ken Cutler has a letter that is quite illuminating (letter can be found here).  In it, he expresses his views on the importance of the protecting the Orchestra’s endowment—making it clear that this is the primary concern of the Orchestra’s board.  He also makes clear that the reason the board cannot accept the musicians’ proposals to end the labor dispute is because these proposals are not financially sustainable over the long-term, and ultimately fail to adequately protect the endowment.  The result of accepting such a proposal, he warns, would be a slow death-spiral of financial troubles that would lead inexorably to bankruptcy.  He is firm in his determination to not let such a thing happen.

First, I am pleased to see the board acknowledging that the musicians have, in fact, made a counterproposal, as this has been a point of some contention.

More to the point.  Mr. Cutler, I respect your viewpoint, and readily concede that the safety of the endowment is a vital concern for the organization.  You are right to insist that it be protected.

But I profoundly disagree with your comments.

Let me back up a moment and point out for my readers that historically the Orchestra has had three major revenue streams:  earned revenue (primarily from ticket sales), donations and draws from the endowment.  For some time, these three areas have been roughly equal, each comprising a third of the organization’s total revenue.  If the total Orchestra budget is $27 million, this would consist of roughly $9 million—a substantial sum.  Obviously this number changes from year to year, but this should suffice for a rough estimate of the size of the draws.

But this brings up a critical point—two-thirds of the Orchestra’s income does not come from the endowment, but from ticket sales and donations.  And these two revenue streams, which again comprise the lion’s share of the budget, are closely tied to the performances that happen day-in, day-out on the stage of Orchestra Hall.  Forgive me for being obvious, but people buy tickets because they want to see that particular performance.  They donate because they were inspired by what they heard, and because they know the Orchestra makes a huge difference in the community.  It is the high quality of the artistic product that directly and indirectly generates most of the Orchestra’s income.

Put another way, 300,000 people pass through the doors of Orchestra Hall not to hear a weekly update on how the Orchestra’s investment portfolio is performing, but how the Orchestra is performing.

Therefore, Mr. Cutler, I’m surprised at how much emphasis you’re placing on the health of the endowment at the expense of all other issues.  Let me be clear:  you and your colleagues on the board are not there to support the Orchestra’s financial endowment, but the Minnesota Orchestra.  As a whole.

The musicians (and those who support them) make an important point that I have not seen the board address—that if you make substantial cuts, replace well-known musicians with cheap replacements, or remove a beloved, supernaturally-talented conductor, the Orchestra as a whole will suffer.  And it’s not just the artistry that will be impacted; people will be less inclined to buy tickets or to make a donation.  The Orchestra will become mediocre and ultimately irrelevant, beginning a death-spiral every bit as fatal as the financial one you envision.  I have argued before that Orchestra musicians aren’t simply staff members, they are your product… and companies that make substantial cuts to their product rarely fare well.

Do you disagree?  Do you believe that the same amount of people will be willing to pay the same amount of money on tickets if you make all these cuts?  Do you believe the community members will offer up an equal amount of contributions if they are uninspired by tepid playing and anemic outreach programs?  I’ve asked this question before but I’ll ask it again—do you have a plan for what success looks like?

Will your determination to protect one-third of your revenue hamper your efforts at raising the other two-thirds?

But let me also address how odd it is for the board make such a definitive stand on the issue of the endowment.

Mr. Cutler, for some time the public has had questions about how the board managed the endowment over the last five years or so.  Right from the start of the current labor dispute, people looking over the Orchestra’s financial statements noticed that while all non-profits—and arts organizations in particular—saw losses in their investments following the 2008 recession, the Minnesota Orchestra took a disproportionately large hit (see this article, for example).  In particular, it appears that $14 million in securities was lost in 2009.  Many have asked why this was the case… did the Orchestra engage in risky asset shifts that led to a huge loss?  To my knowledge this important question has never been answered.

This is important. It serves to undercut a major portion of your rationale—that the safety of the endowment is your paramount concern, and that you are working diligently and responsibly to protect it at all costs.

Well, apparently that wasn’t the case in 2009.   So you will forgive us if we’re skeptical now.

Another point.  The Orchestra’s leaders have repeatedly stated that the huge financial draws they’ve been forced to take from the endowment are unsustainable.  Fair enough.  But as others have pointed out repeatedly, the board chose to take these unsustainable draws in order to artificially balance the budget.  It was a public relations strategy—developed in consultation with a PR firm—for the stated objective of making the Orchestra appear financially sound so it could receive state bonding money.

Again, the huge draws were part of a freely-adopted public relations strategy, and not from financial need.

And the truth is, you’ve been manipulating totals for years, as indicated by your own board meeting minutes.  I’m not saying your actions were illegal or unwarranted; but for many of us, this fact undermines your whole case, and makes it difficult to believe your present-day concern with the state of the endowment.

In effect, your activities indicate that you think it is perfectly permissible to make extraordinary draws from the endowment so that the organization looks good in front of a legislative hearing.  It is not, however, permissible to make extraordinary draws to safeguard salaries, maintain standards, keep a concert season in place, or to generally help the Orchestra to survive.

I’m not sure this reflects well on board’s position as careful stewards of the organization… or its financial investments.

A final question:  what would have happened if instead of artificially balancing the Orchestra’s budget through unsustainable draws off your endowment, you had instead taken smaller draws and allowed the Orchestra to show a small, but perfectly understandable deficit—essentially to spread out the current $6 million deficit over the last four years?  Would that have been less damaging to the endowment?

Mr. Cutler, I thank you for sharing your views on this matter.  But I’m afraid I must profoundly disagree with your positions and priorities.



16 thoughts on “Stewards of the Endowment?

  1. Thank you for setting up your rebuttal so thoroughly with appropriate contextual information, and then posing questions that remain essentially unanswered (or, answered insufficiently). You, and all who support the musicians, must continue to challenge this “magical thinking” proposed by people who darn well should know better.


  2. Thank you. If only the board and management were as thoughtful in their approach to running the orchestra as you are in your analysis and writing. It is amazing there appears to be no appreciation between the quality of the artists, the performances, ‘the product’ and the ultimate financial health of the organization.


  3. Sounds like Mr. Cutler’s number was up to test the waters and submit something to the Strib. Every time they poke their heads above ground they get it right between the eyes. And you didn’t even need to bring up the NYCO’s disastrous investment decisions. Bravo.


  4. Excellent rebuttal, Scott. This post needs to be published in mainstream media to get this information out. Hmm, now how does that happen when the CEO of the Star Tribune is on the Board of Directors for the Orchestra?


  5. Now, at last, some real discussion of the money. Thank you.

    Another piece I’ve wondered about: it’s good practice with an endowment to time the drawdowns when the market was high. It looks like the board did just the opposite of that. Would they have saved money by running deficits during the recession, instead of drawing down when the market was low?


  6. Musicians most of the time start learning their instruments at the age of 5 . They form a love for the music and the instruments they choose. Countless hours of practicing , lessons, orchestra rehearsals and a whole lot of money went into who they are and how they play. They took this path probably from hearing their instrument played or an orchestra concert.
    Now the CEO’s and other board members at the age of 5 were out playing and having fun. Who at 5 says I want to be a CEO no one. They didn’t dedicate their whole lives to get were they are. There are no CEO lessons Sometimes there in the right place at the right time or they were bullies and plowed their way to the top. For how the board members are acting gave me those ideas.
    The board members overlook this very important part of the Musicians ,with out them you have no product to sell, money not coming in and they are working to put everyone out of work even them selfs. Plus who monitored the board members on how much money they can take out as pay or bonuses ? That is not their money that is the Orchestras .The Musicians can’t say We all need a big bonuses this year.
    I wish there was more that the public could do. I also wish the public new more of the truth not what the high powered people want them to know. Well I could go on , but I think I made my point .
    Hold strong Musicians .


  7. Excellent post, Scott. I do enjoy your posts on the MO. Another money matter that seems to have been deflected: Henson’s bonuses in 2011. If the finances were in such dire straits, how can they justify those bonuses? On the other hand, if he got them for doing his job above and beyond, then I’d say the musicians deserve bonuses for doing their jobs above and beyond. Whenever a Board member opens his/her mouth, I often wonder exactly where his/her brain is. What they say has no logic. Gina Hunter is also writing about the MO this week, but the actual governance and its history, who the Board is accountable to, and maybe, maybe, she’ll react to Phyllis Kahn’s proposed legislation. Check it out….


  8. To sum these questions up, we can ask whether the board has performed to the same standards as the musicians. Answer: it has not. An orchestra is an artistic undertaking and enterprise. Why then are the musicians being asked to take the hit? Your orchestra needs new directors.


  9. Thanks for this response!

    There’s also the question of what is being drawn from the endowment to support management expenses while producing no concerts — some $13+ million since the lockout began!


  10. Thanks for this wonderful rebuttal and explanation of what it takes to be a true custodian of an orchestra. It saddens me that this MOA board member would use the settlements of Atlanta, St Paul Chamber Orchestra, and Indianapolis as good examples of settlements. All three were lock outs that didn’t need to happen, and ended in regressive settlements. There were far more success stories to remember, such as Kansas City and St. Louis. Of course, there are boards who look at cutting the product as a big success and will do anything to accomplish this, even if it destroys the very product they pretend to be supporting.


  11. Pingback: Funding settlements in the city of London | City Endowments Ltd

  12. Pingback: An Odd Response from the Orchestra | Mask of the Flower Prince

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