Sunday, August 10, 2003

Symphony eats into endowment

Despite plunge in value, fund being tapped for expenses

By Janelle Gelfand
The Cincinnati Enquirer

While other orchestras have folded, declared bankruptcy and announced huge deficits, the Cincinnati Symphony Orchestra is still in business, has significant reserves and no debt.

Yet the CSO is dipping increasingly into shrinking endowment funds to cover operating expenses, an Enquirer examination of the orchestra's finances shows.

The orchestra's net worth fell $17 million last year, according to the tax return that the orchestra filed in June - after an extension - for fiscal year 2002. Its total net assets dropped from $94 million to $77 million.

As its endowment - largely invested in stock - has fallen, the orchestra has increased the amount of money it is taking out of it to support its operations. Up to 8.7 percent is projected next year.

"What's hurting them is that their investments, like everybody else's, haven't done very well in the last couple of years," says John Cumming, professor of accountancy, who just stepped down as department chair at Miami University. If the CSO continues to draw money out of its endowment at its current rate - and if the stock market continues to sputter - the orchestra could be in serious financial trouble in less than a decade, he says.

The 2001-'02 season, the first for music director Paavo Jarvi, coincided with the national turmoil of 9-11 and a plummeting stock market. The orchestra took a triple-whammy hit during the fiscal year that ended Aug. 31, 2002: investments, ticket income and donations.

Those hits included:

• 70 percent of the endowment is invested in the stock market. The CSO's portfolio fell by $10 million over the year, from $72 million to $62 million.The CSO earned $1.05 million less interest than last year.

• Orchestra ticket sales dropped nearly $900,000.

• Contributions to the CSO, in particular public support, were down about $1 million.

None of this is mentioned in the orchestra's "Summary Financial Report." The CSO reported an operating deficit of $417,000 for the last fiscal year, which included two large write-offs. That deficit was erased by its "four-year, break-even" budget cycle, showing a small surplus, the report states.

"The report paints a much rosier picture of them than the (IRS form) 990," Cumming says.

Investment woes

The CSO is the city's richest arts institution. In 1999, it had an endowment of more than $94 million. But with the downturn in the economy, the orchestra has watched that nest egg plummet to a current level of about $62 million. At its lowest point, in February, it reached $58 million.

To cover operating expenses, the CSO has been dipping into its endowment at a record rate. In a falling stock market, the symphony drew 6.9 percent in fiscal year 2001 and 7.9 percent, or about $7 million in 2002, says Don C. Auberger Jr., CSO finance director.

The orchestra hopes these dips into the fund will cover operating expenses for this year and next but is bracing for the long haul with a new strategic plan, to be adopted next spring.

CSO board chair Daniel J. Hoffheimer knows the increased draws on the endowment are "unsustainable."

"For now, we are using a tourniquet," he says.

Robert E. Goldstein, a partner in the national law firm Foley & Lardner in San Diego, says the orchestra's financial picture looks unsound.

"This is an organization, not unlike others with declining endowments, that is dipping into endowment funds for operating expenses," says Goldstein, who has lengthy experience with nonprofits.

"If the market doesn't turn around, or if they are not successful in their fund-raising campaigns - the organization could, in the future, be in financial dire straits."

The board approved increased withdrawal rates for two years only to help sustain the CSO through the lengthy stock market slump, says CSO president Steven Monder.

"We want to return to the 6 percent draw as soon as possible," he says. "It is important to understand the purpose of an endowment is to benefit both current and future operations of an organization, i.e., to provide stability during difficult financial periods as well as for the future."

The orchestra has been reluctant to try to cut expenses, fearing it would affect artistic quality.

"No one wants to draw more than wisdom would dictate from the endowment," Monder says. "But it also didn't feel appropriate to try to reduce the expenses of the organization to the possible detriment of the organization, while the endowment stayed low."

Indeed, the CSO has little leeway in how it can slash costs - musician salaries are fixed, for instance. Musician and management salaries were up more than a half-million dollars in fiscal 2002.

"Their costs continue to go up, and their revenue stream is going down. You can't do that forever," Miami University's Cumming says. "With the not-for-profits, it's going to be harder and harder to achieve a balanced budget by getting nonprogram revenues, (such as) charitable grants from government agencies. Those things just aren't going to be there."

The financial foundation

An endowment provides a source of income for institutions such as universities, hospitals and symphony orchestras. For example, Miami University draws about 4.5 percent from its endowment, says MU's Cumming.

Orchestras with large endowments typically lose money, and make up the loss by drawing money from their endowments. The CSO computes its draw - this year 8.35 percent - from a "rolling average" return over 12 previous quarters.

For the group of the 23 largest orchestras, the average draw in 2001-'02 was 6.8 percent, says Jack McAuliffe, vice president of the American Symphony Orchestra League.

"Orchestras are looking to see what they can do in the short run to weather what may be a temporary aberration," McAuliffe says. But if the market fails to return to its pre-Sept. 11 highs, "then orchestras need to, in fact, find a new balance structure."

It seems clear that part of the CSO's strategy will have to include stepping up annual giving, and mounting a major fund drive. But raising money is tough in today's climate.

The orchestra gets a large chunk from the Fine Arts Fund - $2.76 million last year, the largest of the "Big Eight" Tristate arts organizations. But annual giving - mostly small, yearly donations from the average concertgoer - makes up just 5 percent of its budget, which is low compared to some orchestras. (The St. Louis Symphony's annual giving is 25 percent, for instance.)

Hoffheimer acknowledges the problem.

"We raise fewer dollars from annual giving than many of the other top-10 orchestras," he says. "But we are the smallest city."

Further, the CSO's longtime loyal and generous donors are aging, with no one to succeed them.

"You have to have faith that there will be some, although it is possible there won't be," Hoffheimer says.

Break-even mode

Looking ahead, the CSO will negotiate musicians' contracts again in September 2004. It has switched to a "two-year, break-even" budget cycle. The 2003 fiscal year ends August 31.

"This year will be tough," the CSO's Monder says. "It will be near budget, or darn close to it. But this two-year cycle has to break even."

Because of the generosity of Cincinnatians in the past, coupled with the hot stock market of the '90s, the CSO has been able to tap a large endowment, and avoid the meltdown experienced by other orchestras. The struggle will be to make changes that will bring the financial side of CSO operations back into balance, and keep the remaining endowment intact.

In the early '90s, patrons wrote checks and endowment funds were used to get the orchestra out of debt, when the CSO had an $8.4 million accumulated operating deficit. In 1998, the CSO announced its Second Century Fund campaign had up to $37 million in commitments.

It may be harder to get people to open their pocketbooks again.

"They can ask," Goldstein says. "They wouldn't be alone, I can tell you that."

John Byczkowski and James McNair contributed.


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