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.