Cooking the books

This is a pretty amazing story:

For four years, the Minnesota Orchestra board has walked a tightrope between managing public perceptions about its financial health and making its case to cut musicians’ salaries.

As early as 2009, board officers were discussing how much money to draw from investments, and the advantage of reporting balanced budgets at a time when the orchestra was raising funds and seeking state money.

“Balances in 2009 and 2010 would support our state bonding aspirations,” Bryan Ebensteiner, vice president of finance, told the orchestra’s executive committee in September 2009, “while the deficits in 2011 and 2012 would demonstrate the need to reset the business model.” His comments are included in minutes of the finance and executive committees obtained by the Star Tribune.

The board chose to cover operating deficits in 2009 and 2010 with major withdrawals from its investments. Then, in 2011 — on the cusp of labor negotiations with musicians — it “drew down” less money and declared a $2.9 million deficit.

Or, to put it more simply, the board was trying to look good for the state and bad for everyone else.

But there was nothing dishonest about this, for Pete’s sake:

In an interview last week, Board Chairman Jon Campbell rejected suggestions that the board had manipulated deficits for strategic and public-relations reasons.

“If it was a cover-up, would we have been that transparent in the minutes?” said Campbell. “We spent countless hours with attorneys to make sure we understood the state law about how endowments work, and the accountants had to agree with our approach to give us an unqualified audit.”

Which is not exactly an answer to the charge of manipulation. The question is not whether the board operated within the law; the question is whether the board was honest with its constituencies about its financial condition.

In January 2009, Campbell, then finance committee chair, told the board it needed to decide whether to show operating losses or take larger-than-normal endowment draws.

The need to manage public perception and simultaneously make a case for musician pay cuts animated discussions at finance and executive committee meetings over the next two years. In 2011, after choosing to balance its budget the previous two years, the board retained the public-relations firm Padilla Speer Beardsley to determine “what size of deficit to report publicly, between $2.9 million and $4.3 milion.”

Campbell said it is not unusual to consult professionals on reporting news and claimed that “there was no attempt at manipulation.”

So I guess the board wasn’t honest with its constituencies about its financial condition. Not, it’s not unusual to “consult professionals on reporting news.” It is, however, quite unusual to let PR professionals advise on how big a deficit a non-profit is going to run and to manipulate the organization’s finances and internal cash-flow decisions accordingly. One might even describe such behavior as unethical. It’s certainly not the way an organization that’s concerned with maintaining the trust of its constituents behaves.

President and CEO Michael Henson said the board’s deficit-reporting decisions were strategic.

“However you want to present the argument, the reality is we have got to change the business model, because our endowment is being spent down,” he said.

I’m not sure why describing those decisions as “strategic” makes things any better – and, of course, the board’s decisions were not about how to report the deficit, but actually how big a deficit to run, which is quite a different thing.

The documents obtained by the Star Tribune reveal that in September 2009, the executive committee contemplated four possible strategies for covering budget imbalances. The favored scenario would be to report balanced budgets for 2009 and 2010, and deficits in 2011 and 2012.

But there were risks. “Negative outcomes would be that the gap between public announcement of balance and the internal reality of deficits in 2009 and 2010 would need to be maneuvered carefully, and that the deficits in 2011 and 2012 might hinder fundraising,” according to the minutes.

There are really only two possibilities. One is that the board essentially covered up the ” internal reality of deficits in 2009 and 2010″ in order to make its financial condition look better to the state than it actually was. The other is that the deficits of of 2011 and 2012 were equally phony in order to bolster the board’s case “to reset the business model” – which, as is usually the case, was code for “pay the musicians a lot less.” But either possibility means the board misled the public, the state, its donors, and its employees.

If the board really believed that it was spending beyond its means at an unsustainable rate, the proper course of action with regard to its musicians would have been to push for an adjustment in 2009 beyond what was actually achieved in that re-opener. Did they really end that negotiation by telling the musicians that they would be coming after them for 40% cuts in two years? I rather doubt the musicians would have ratified the re-opener had that been the case. I suspect the musicians were told that what they gave back would go a long way to fix the problem, while the board leadership planned all the while to “reset the business model” in 2012.

I lived in the Twin Cities for eight years. It’s a remarkable place, with a remarkable philanthropic culture and infrastructure of non-profit organizations. The people that run the Minnesota Orchestra are a disgrace to that culture. The board should resign and the new board should make its first order of business to fire Michael Henson. Maybe then the orchestra can be run by people with ethical standards above those of the bottom 20% of used car dealerships. The Twin Cities, and the Minnesota Orchestra, deserve better.