“Or Its Accredited Successor”

You know, in my many years as an arts administrator, I’ve seen my share of wrong-headed thinking about the arts. I’ve seen ideas that seemed good at the time turn out to be disastrous. I’ve seen great ideas languish because too little effort was done to make them work.

But the last couple of weeks watching the leadership of the Baltimore Symphony Orchestra (BSO) flail around has been truly awe-inspiring.

This week, the true extent of this galactically bad thinking was laid out in an article in the Baltimore Sun. An article where supposed leaders of the organization openly muse on folding up a 103-year old organization and (maybe) creating a replacement.

This isn’t a case of not being able to see past blind spots. This isn’t a case of being overly ambitious.

No, this is a case of willfully embracing a wrong-headed strategy solely on ideological grounds, and being willing to burn down an existing organization to possibly create a hypothetical new one more to their liking.

To be blunt, this is an example of astonishingly short-sighted thinking, warped by ideology, presented by way of a bad-faith argument, that shows profound ignorance of how the world works, and is setting up the organization for an epic failure.

Let me draw directly from the article to explain.

* * *

“But the BSO’s finances arguably are so unstable that members of the endowment trust supporting the symphony balk at lending or giving it even one penny more than the $6 million it has received this fiscal year. Some trustees worry that releasing more funds to an organization they say is in dire financial straits would be tantamount to pouring money down a drain.”

Well. No burying the lede here. Right from the very beginning, it’s clear that the folks in charge of the BSO’s endowment—again, an endowment that was set up to support the BSO—are so unhappy with the BSO’s finances that they are now deciding… to not give the BSO “one more penny.”

Let’s take a step back to figure out why this is so infuriating.

First, to make clear (and as the article in the Sun points out), the BSO has a $60 million endowment—a collection of funds provided by donors to ensure the BSO’s long-term health.

And “long-term” is the key point here. Rather than giving, say, $100 for the BSO’s immediate use, the donors put the money into an invested fund with the expectation that the orchestra would use the dividends in perpetuity. So rather than having $100 to spend right now, the organization will be able to access to $5 or so for the rest of its existence. This is the strength and weakness of an endowment: it freezes a lot of resources up front, but gives a steady stream of dependable income that an organization can plan around.

And to be sure, the trustees of an endowment must think about the long-term use of the money. They are charged with making sure that the income stream is dependable, and have a fiduciary responsibility to honor the donor’s wish that the funds will still be available 50, 100, 150 years or so into the future… building what is called generational equity. Inside Philanthropy has a helpful explanation of how this plays out:

One easy way to understand generational equity is to consider a permanently restricted gift whose income is restricted to purchasing books for the library. If a donor gave a $50,000 gift and the spending policy was to spend 4 percent of the fund’s balance, in the first year, $2,000 would be available to purchase library books. If books cost an average of $100 each, this $2,000 would purchase 20 books. Generational equity means that 50 years from now, the charity should still be able to purchase 20 books per year. If we assume that inflation will average 2 percent per year, than in 50 years, the price of a library book will be $264. At that price, in order to purchase 20 books, the endowment principal will have to generate $5,280. With a 4 percent spending policy, the principal of the fund will have to have grown to $132,000 in order to generate $5,280 of annual spending.

In order to accomplish this, the $50,000 fund will have to grow by 2 percent per year. Since the spending policy calls for using 4 percent for annual appropriations, the investment policy needs to have an objective of producing a total return of at least 6 percent net of all other costs and fees. You can now see how the charity’s investment and spending policy work hand-in-hand to assure generational equity. The charity should monitor the balances each year to see if any adjustments are needed to either the investment or spending policy (or both) to assure generational equity. However, it is generally considered inappropriate to appropriate nothing in order to re-build the fund’s balance.

So I agree that the trustees of the BSO endowment should be thinking about the future. They should be prudent.

But.

It is useful to remember that this is not some closed experiment, computer simulation, or the Holy Doctrine that once proclaimed can never be reversed. The BSO situation involves real people and is happening in real time. And, the decisions being made are being done by humans making specific choices for specific reasons.

Right now, the BSO is going through a tough financial climate. The trust documents say that a draw from the endowment should be 6% of the fund’s average over the past five years. Maryland law states caps the size at 7%, but allows more in an emergency. The BSO states that the draw for this year was only 5.75%. The stock market has of course had some blips, but over the past few years has famously been on an epic bull run. The BSO management notes that there was a 8.2% gain this year…so it’s not like pumping up the draw to 6% is going to catastrophically wipe out the year’s earnings.

So let’s go back to the opening statement. The endowment trustees don’t want to pay ”a single penny” more than the allotment they’ve decided is “prudent” and have already provided… even though it is not at the maximum per the fund guidelines, and not anywhere near the cap under Maryland law. And they are literally saying that giving the BSO money that is entitled to is just “throwing money down the drain.”

This statement is made all the more astonishing when you realize that by not paying out the funds the BSO is entitled to, the endowment’s trustees are actively contributing to the organization’s financial problems.

But worse, it’s clear that this is a choice. The trustees aren’t legally bound to give out 5.75%… they have chosen to do so. Of their own accord. For their own reasons.

Which begs the question: why choose to make these continuing, conservative draws that leave the organization starved for cash during a record-breaking year for Wall Street investments?

And why choose to blame the BSO for the resulting money gap?

Again, these are funds set up to support the BSO and cushion it from financial shocks. For reasons of their own, the trustees aren’t fully doing so, leaving money on the table, so to speak.

So… what are the funds going to be used for?

 

“Some trustees say that prudence requires them to hold onto the $60 million endowment in case it’s needed to bankroll a future replacement orchestra. ‘The endowment trust was created to support the BSO or its accredited successor,’ Chris Bartlett, chairman of the Baltimore Symphony Endowment Trust, wrote in an email. (The emphasis on ‘or’ was Bartlett’s.)”

Wow. So that’s where the money is going. The trustees looking ahead to funding a newer, different orchestra.

Or to clarify, the trustees are choosing to withhold much-needed funds from a respected, venerable, 103-year old orchestra—choosing to actually force financial hardship on an organization they are charged with protecting—and when it folds, they’ll maybe support some sort of new orchestra that arises from the ashes.

This is monstrous.

Again, I don’t dispute that trustees have to take the long view. But they are supposed to take the long view of the Baltimore Symphony Orchestra—the entity the endowment was created to support. Not the long view of some hypothetical group that may or may not exist in the future.

There are so many things wrong with this picture. Let’s start with the most basic, obvious questions:

• Would a new orchestra actually arise from the ashes? Isn’t that a huge gamble to take? Back during the Minnesota Orchestra lockout, many folks asked the musicians why they didn’t just create a new orchestra of their own? The answer was made clear again and again—it is supremely hard to create an orchestra from scratch. It requires a significant staff to get it up and running. It needs a place to rehearse and perform. It needs HR expertise to hire musicians. It needs significant capital to pay salaries, healthcare right from the start… or no one will come to work for it. And so forth. Why go through all that time, trouble, and expense when… there’s already an organization that has all these things?
• Does this line up with donor intent? Donors to the endowment made their gift to support the BSO, as they understood and loved it. Many donors make provisions for long-range endowment gifts, knowing that times change and organizations evolve. Many of these provisions are done to recognize, for example, that today’s Minnesota Orchestra was originally constituted as the Minneapolis Symphony Orchestra; the Minnesota Orchestra is its successor. Stipulations can mean that they want a continuance of support. I can’t imagine any donor seriously considered that the old BSO could be killed off, and maybe brought back in a different form. Who on earth would give a legacy gift under those conditions? Why would you give an endowment gift to support an orchestra knowing that it could be transformed into a part-time dance band at some future date?
• Who will support this hypothetical ensemble? If the BSO is forced into some sort of transformation—led by the very trustees tasked with ensuring its long-term support—who will support it? Already the community is boiling over irritation about a sense of betrayal… what will happen if the existing BSO is junked in favor of a successor? Another point that was made again and again during the Minnesota Orchestra lockout… if management succeeds in downsizing and downgrading the group, will audience members pay the same rates for tickets? Will donors give leadership gifts at the same level? Will the same caliber of musicians audition, and will they stay long if they’re hired?
• Would you trust them at their word? What guarantees would anyone have that trustees that seem to be done with the current ensemble would actually move forward to embrace and support a new one? What if they just choose to go to court to liquidate the endowment?

Who are these people to put forward such a ridiculous idea forward?

 

“The players claim the BSO board leadership exerts too much influence over endowment trust decisions.

Nine trustees make up the endowment’s board. Under the 2006 Endowment Trust Agreement, three must be the BSO’s president (Kjome); the BSO board’s chair (Bozzuto) and the BSO board’s treasurer (former Anne Arundel County Executive Steven R. Schuh).

The BSO board appoints the remaining six trustees, who the trust agreement defines as ‘members of the community who are neither officers, directors nor employees’ of the symphony. But Bartlett is the sole trustee with no previous ties to the organization.

Two — Kenneth W. DeFontes Jr. and Calman J. “Buddy” Zamoiski Jr. — are former BSO board chairmen. Another, Joseph Meyerhoff II, is the grandson of the philanthropist for whom Meyerhoff Symphony Hall is named. The final two, Rick Monfred and Andrew A. Stern, are former BSO board members.

‘The BSO board appoints the endowment fund’s trustees, and it can remove them,’ Mulligan said. ‘Therefore, the BSO board is the controlling institution and not the other way around, which is what they want people to think.’

Well, here we go. A third of the trustees are made up by the BSO’s leadership team that is trying to force sacrificial concessions on its musicians. They are leading the lockout right now, and have a blatantly obvious conflict of interest in playing the endowment as a labor negotiation tactic. Nearly all the remaining trustees are similarly connected, and similarly conflicted.

I don’t want to disparage anyone—particularly when I’ve never met them—but surely they must recognize how little credibility they have in this situation. They may have the best of intentions, but their actions are completely (and quite conveniently) putting them on one side of a dispute, taking actions that just happen to perfectly reflect the position of one of the two sides. Who can see this as accidental? It is impossible to give them the benefit of the doubt.

Why on earth are they thinking this is a good idea?

 

“According to Robert J. Flanagan, author of the 2012 book, ‘The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges,’ it would be a mistake to divert every cent of the 8.2% interest the endowment earned in the last fiscal year (according to Beckwith) to the operating budget. There are expenses associated with endowments, and Flanagan said a responsible annual draw should not exceed 4 percent, or in some cases, 4.5 percent.”

They’re getting advice from Robert Flanagan?

For those who don’t recognize the name, Mr. Flanagan wrote a book that everyone was talking about a few years ago. The book was (and is) the epitome of post-Great Recession panic-ism—a screed driven by hysteria. It was another in a long line of works declaring that classical music is “dying,” which conveniently placed the blame on union salaries because they were “unsustainable.” It lines up with the notorious “Baumol’s Cost Disease” malarkey, and harps on the idea of “structural deficits.” Both these concepts caused panic during the Great Recession, but have repeatedly shown to be overblown hype (see here or here, for example). The book’s dire predictions about the classical music industry have not come to pass, and as I’ve posted many, many times now these concepts are past their prime. Also, it’s important to note that all kinds of classical ensembles that are having banner years.

And I’m fascinated by the point Mr. Flanagan is making here—that it would be “a mistake to divert every cent of the 8.2% interest.” This is a straw man argument. The trustees aren’t even making use of the 6% they are entitled to draw right now. The musicians are proposing that the rate be temporarily bumped up to the legal cap of 7%, in light of the present emergency. Because there is an emergency.

While Mr. Flanagan is right that in general it is not a good idea to dip too far into the endowment, it is astonishingly disingenuous to make this argument when the management is actively slashing weeks out of the performing calendar and imposing sacrificial cuts on the organization… and the endowment trustees are talking to the press about scrapping the BSO all in favor of some new, undefined ensemble.

* * *

So… what’s really going on here?

The shockingly cavalier attitude from the trustees (again, a group that includes the leadership of the BSO who implemented and is maintaining the lockout) essentially gives away the game. It’s hard to see this mess as anything but a simple case of manipulating the endowment as a labor negotiation strategy—inflicting financial pain to force concessions in an ongoing labor dispute.

They do have a responsibility to look to the long-term, but it’s hard to see that as their “long-term thinking” is anything other than a thinly-veiled cover to go after the musicians here and now.

But worse, I can’t covey how disturbing their apparent “long-range vision” actually is. It appears that they are already thinking ahead to a new orchestra, and lining up their support behind it. Presumably this one will be a non-union group, to avoid all those “expensive contracts” that they feel are leading to “structural deficits.”

This all makes it hard to believe the trustees’ oft-stated concerns about “donor intent.” Surely they know that how hard it is to launch a successor orchestra, or to foretell what such an ensemble would look like, to be able to accurately gauge if such a hypothetical group matches the donors’ intentions when they made their gifts to the BSO. And they have no idea of what community response would be.

So… stop this. Stop the nonsense about a successor organization. Step up for the organization that’s right there in front of you.

That is your job as trustees, isn’t it?

.