‘Structural Deficits’ and Accountability

Henry Peyrebrune

August 12, 2004

This conference takes place during a period of unprecedented difficulty for our orchestras.  Over the past two years, the vast majority of contract settlements have been concessionary.  Most of the larger ICSOM orchestras are currently in negotiations and most are faced with concessionary proposals.  We hear much talk from managers about ‘structural deficits’ and the need for musicians to be ‘partners’ with management and ‘do our share’ to alleviate the fiscal problems.  Indeed, one large ICSOM orchestra is asking for its musicians to ‘do their share’ and become partners while engaging in a full-scale public relations campaign to discredit them.

What, in fact, is a ‘structural deficit’?  Structural deficit is a calculation economists use to describe the size of government budget deficits that would exist if economic growth (GDP) were at its maximum potential rate (at full employment). It equals the actual deficit minus the deficit caused by cyclical economic changes.  Symphony orchestras are similar to government in the sense that they are both nonbusiness organizations.  Could this concept also be applied to orchestras?

In order to determine the size of an orchestra’s structural deficit, it would be necessary to compute the effect of the economic cycle on revenues and expenses.  This could be inferred from the effects of past economic cycles on revenues.  The deficit as a percentage of expenses during periods of fastest growth in revenues would be the structural deficit.  Orchestras that balance budgets or run surpluses during these periods of peak growth would not have structural deficits as they are classically defined.

Some have suggested that the roaring economy of the late 1990’s masked orchestras’ structural deficits; in essence, the rate of increase in revenues was anomalous and not likely to be repeated in subsequent economic upturns.  If this is so, one would expect to see accumulated surpluses for those years.  It is more likely that expenses were set to grow at the peak rate of economic growth, rather than at a median rate that would allow cyclical surpluses to offset cyclical deficits, all other factors remaining unchanged.

Orchestra managers seem to be using the term to indicate a gap between expenses and revenues that won’t be closed by the current upturn in the business cycle.  However, this issue deserves a closer look.

I believe that these deficits, to the extent that they exist, are the result of three factors.  They are:

• partially cyclical.  Giving to arts organizations increases faster during times of economic growth and often decreases during contractionary periods.[1]  The IRS just released data indicating that “the top income brackets (our big donors) lost twenty-eight percent of their income on average during 2000-2001.”[2]  Surely this accounts for part of the stagnation in contributed income.

• partially structural, but only in the sense that the deficits may not be eliminated simply by an upturn in the economy.  However, it seems apparent that many orchestras adjusted their spending to meet the ‘irrationally exuberant’ growth rate of the late ‘90’s.  This might also be viewed as cyclical in the sense that it stems from ignoring the economic cycle and its inevitable downturns.  More to the point, this increase in expenses didn’t just happen; it is the result of particular decisions made by individuals.  It is worth noting that musician costs have not grown at drastically greater rates, and as budgets grew in the 1990’s, musician costs as a percentage of the budget actually declined. (See Eric Beers’ article in the August 2004 International Musician.)

• partially a result of the world changing around us (as it always has).  Classical music was once viewed as the epitome of culture; now it is just one type of music among many.  For example, look at the decline in classical music reporting at the New York Times and other papers.  Contrast NBC Television of the Fifties commissioning Amahl and the Night Visitors and this year’s Super Bowl half-time show.  Knowledge of classical music was once considered an essential part of a middle-class education; now we are becoming the counter-culture.  We do not yet know the magnitude of this change.  Other factors such as changes in the local economy, changes of leadership, etc. can also affect individual orchestras.   Orchestras have evolved to meet changing circumstances for more than 400 years; we will obviously continue to adapt to today’s circumstances.

This graph[3] shows that orchestra revenues seem to track the economic cycle.  It also shows that orchestras adjusted their overall spending to meet the faster rates of economic growth in the late 1990s.

The obvious conclusions from this analysis are:

• Orchestras need to achieve real revenue growth, beyond the cyclical growth in good economic times, in order to achieve sustainable growth. 

• Orchestra managements need to recognize that revenues will follow the economic cycle, and steward resources in order to avoid the cycle of cuts in each economic downturn.

Is there something else that can be done to help ensure the financial health of our institutions and the stability of our livelihoods?  I believe the following proposal could contribute to strengthening our orchestras.

It is time for orchestras to make public their audited financial statements.  The Financial Accounting Standards Board (FASB) says:

“Financial reporting should provide information that is useful to present and potential resource providers and other users in assessing how managers of a nonbusiness organization have discharged their stewardship responsibilities and about other aspects of their performance.[4]

“Despite different interests, resource providers of all entities look to information about economic resources, obligations, net resources, and changes in them for information that is useful in assessing their interests. All such resource providers focus on indicators of organization performance and information about management stewardship.”[5]

Our performances are publicly reviewed each week by the audiences and by expert critics in the local papers.  Corporations file detailed audited statements with the SEC each year and there exists an entire industry to analyze and review these statements in order to advise potential investors.  I’m certain that this type of scrutiny is far from unknown to most of our trustees.  Yet, the finances and decisions of most orchestras remain dark secrets, accessed only when we need to confirm that a serious deficit is real.  It is time for orchestra managers to be publicly accountable for their stewardship of their organizations and their donors’ money.

Audited financial results are usually not available until several months after the fiscal year has ended.  In order to have more current information, another step would be for the American Symphony Orchestra League to make available the unaudited financial data it collects each season.  Managers submit data on the understanding that it remains confidential among the other managers.  However, if the ASOL and managers want to establish a more collegial relationship with musicians, this would be a good place to start.

What might be some of your objections to these proposals?  Is the financial performance of our orchestras none of our business?  We spend the majority of our careers with one orchestra and are the ones most directly affected by its financial health.  Will our knowledge of the financials be used as evidence of our complicity in their decisions?  The fact that managers will be publicly accountable should lead to more responsibility and better decision making on their parts.  How can we believe the audited numbers, especially in light of Enron and Global Crossing?  These abuses are the exceptions that prove the rule.  They were discovered because they were publicly accountable.  In fact, the new rules under Sarbanes-Oxley will likely become the prudent standard for financial reporting which will lead to more accountability.[6]

These proposals will require some change in the way we operate.  Musicians will need to be able to read, understand and interpret financial statements.  We will also need to understand the details of running an orchestra and be able to evaluate and compare management decisions.  We will need to be diligent observers and analysts of our industry.  We will need the courage to confront poor decisions and the maturity to support difficult ones.

How do we benefit from executive directors being publicly accountable for their stewardship?  First, it would make risky decisions visible before their effects become problematic.  Second, it would give donors greater confidence in successful managers.  Third, it would provide an objective, external way to evaluate managers’ performance and help put a spotlight on ‘repeat offenders.’  Lastly, an industry-wide historical record of financial performance would make it possible to establish objective benchmarks of performance in order to see how an orchestra is doing relative to industry averages and historical performance.

No one has more at stake in the long-term financial viability of our orchestras than we do.  We can do better by spotting potential financial problems before they occur.  Our donors and audiences deserve to be able to compare managements and to know which orchestras are well-run and efficient.  There are too many examples of weak managers moving from one troubled orchestra to another, leaving havoc in their wake.  As orchestras move from totalitarian music directors controlling every aspect of the organization to being led by strong executive directors; and as those executive directors demand and receive salaries comparable to those in the for-profit sector, it is timely and fair for them to allow public review of their leadership.

As managers and the ASOL ask for “partnership” and “collaboration,” let’s ask them for the transparency and accountability that inspires confidence, allows successful managers to thrive and fosters stability for our orchestras.

Notes:

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