A crisis of analysis

Tony Woodcock gave us a classic example of the “dinosaurs falling from the sky” genre of industry analysis on this blog last week. Before I try to dismantle his analysis, I should say that I don’t think he’s entirely wrong. Certainly the field has faced an unprecedented challenge since the beginning of recession in 2008. But before we believe that the sky is raining extinct megafauna, we should look at the facts.

Woodcock began with this litany of woe:

In the last twelve months the Honolulu, Syracuse, and New Mexico Symphonies have filed for Chapter 7 Bankruptcy; the Philadelphia Orchestra and the Louisville Symphony filed for Chapter 11 Bankruptcy; the Detroit Symphony suffered the longest strike in the history of America Orchestras, and the Cleveland Orchestra also walked out during a brief strike in January 2010. There are stories echoing across the industry of major problems at the Baltimore, Seattle, Atlanta, New York Philharmonic, and Minnesota Orchestras. Even the settlements made in Detroit and Cleveland have left these orchestras with substantial structural deficits and depleted endowments, with no clear plan how issues might be addressed, apart from the panacea of more fundraising. Clearly, the field is in crisis. It should be screaming for change, for new ideas. It should be discussing radical solutions.

How on earth did all this happen? How did the Philadelphia Orchestra, for instance, end up with a structural deficit of $14.5 million against an annual budget of $43.6 million and a pension liability of $43 million?

Let’s go back in time and take a considered view. (Here, I’m indebted to the 2007-8 study done by Robert Flanagan of the Graduate School of Business at Stanford University. Click here to read the full, fascinating report.)

You should do so. You should also read the many critiques of Flanagan’s work (mine is here ). And then you should contemplate what happens to orchestras in a recession.

Recessions create the following dynamic:

• Unemployment goes up
• Uncertainty about the future goes way up
• The value of most investments fall
• Interest rates fall
• The net worth of most people falls, with the net worth of the top few percent of the population falling farther (as they have the most exposure to investment risk)

What does this do to orchestras? Lots of things, none of them good:

• Ticket sales suffer
• Donations suffer; especially those from high-net-worth individuals and foundations
• Endowments fall in value
• Endowment returns, which are based on both the value of the corpus and interest rates, fall even more than endowment value.
• Pension liabilities explode for the same reason, which can lead to significant demands on available cash – which, of course, is in shorter supply, due to everything listed above.

I’m not sure what our industry Chicken Littles thought would happen to orchestras when hit by the worst economic downturn since the Great Depression. Orchestras have actually not done badly by comparison with the economy as a whole. Yes, two orchestras have gone down, with the loss of around 150 jobs for musicians (one of those orchestras has gone down before, and not during a recession.) Two other orchestras filed for Chapter 11 bankruptcy – although both of those filings have been contested vigorously and are, frankly, rather fishy.

The early orchestral organizations in the U.S. were created very much in the co-operative spirit that we find at the London Symphony and Berlin Philharmonic (both orchestras were subjects in my two last blogs). Musicians were seen as stakeholders and as members. They chose the conductor, accepted a share of net proceeds, as well as sharing in the risk. These musicians were true entrepreneurs and divided their time between artistic and management activities. Major donors started to take an interest and invest substantially in order to cover operating deficits, to provide stability and expand activities.

All true. Also true were the following:

• There were far fewer orchestras, serving far fewer communities
• Most of the orchestras weren’t very good (at least by current standards)
• Musicians made a lousy living
• Very few people wanted to come into the field

Unionization became a strong shaping force with the creation in 1962 of ICSOM (the International Conference of Symphony and Opera Musicians), which affiliated with the American Federation of Musicians in 1969.

Well, not exactly, but close enough for government work. ICSOM never functioned as a union for symphony musicians; mostly it served to pressure the AFM and its locals to do their jobs.

Through such collective representation, musicians sought greater job security, guaranteed work, and benefits. They were aided in this quest by the Ford Foundation which, in 1965, began making extraordinary grants to orchestras ($85 million to 61 recipients) to improve the working conditions for musicians-a gift that arguably had long-term, if unintended, negative consequences.

Just as an aside: what event in the course of human history has not “arguably had long-term, if unintended, negative consequences”? Unintended negative consequences follow pretty much any decision. The right question to ask about a decision like the Ford Foundation’s funding of orchestras is “did it produce a net benefit?” I’d love to hear someone make the case that we would have had more orchestras, serving more people, and playing better if the Ford Foundation had decided to fund accordion bands instead.

Subsequent contract negotiations transformed the musicians’ jobs into positions governed by Collective Bargaining Agreements that converted compensation packages from a variable to a fixed cost. (The financial model of any orchestra in the country today will show the musicians as the biggest single cost.)

Yes, the cost of paying the orchestra is usually the biggest single cost of running an orchestra – not really surprising for institutions with “orchestra” in their name. What costs would Woodcock have be larger?

The “fixed cost” meme deserves its own blog post. Suffice it to say that musician payroll costs do fluctuate over time (in some orchestras they’ve gone down substantially), that non-musician costs have generally risen faster than musician costs in many orchestras, that in most communities it’s essential to guarantee musicians a minimum salary in order to attract and retain qualified musicians, and that Mahler and Wagner had a lot to do with how many musicians orchestras need to employ.

I once asked a senior and much respected orchestra president how on earth the field ended up with the restrictive contracts we have today. His response was resigned, “They were just better at negotiation.”

If I were not in front of a monitor I paid good money for, I would throw something. The ability of musicians to get good settlements, or managements to demand bad ones (from the musicians’ point of view), has almost nothing to do with negotiating skill. If musicians were successful in bargaining, it was because their fundamental argument – that orchestras would improve artistically if musicians were paid better – was not only correct, but has been proven in orchestra after orchestra. And both managements and boards wanted to see their orchestras improve artistically. That’s because they were doing their jobs.

Since the late 1980’s, musicians’ compensation has increased more rapidly than the wages and salaries of white-collar, blue-collar, and service workers, with a particularly competitive rush across the top-tier orchestras throughout the 1990’s. This, in turn, has fueled musicians’ major argument at negotiations that any erosion of comparative salaries will negatively affect recruitment and retention. This is, of course, a specious argument, but it still goes unchallenged.

“OF COURSE?!” My orchestra has become a poster child for how compensation affects recruiting and retention. Our pay has fallen, in real terms, quite substantially since the early 1990s. (We’re not the only orchestra that’s happened to, although you’d never guess it from reading Woodcock or Flanagan.) As a consequence, what was once viewed as a destination orchestra is now viewed by many of my colleagues as a browner pasture. And replacing those who leave for better jobs has not been easy – certainly harder than it was 20 years ago.

Simply on the basis of  Economics 101, it seems odd to characterize the argument that paying less than competitors for labor will “negatively affect recruitment and retention” as “specious.” Those who make that argument about the economics of the orchestral labor force generally also point out that there are lots of applicants for every opening in orchestras. And it’s true. But there used to be lots fewer, which most observers versed in economics would attribute at least in part to the fact that orchestras generally pay better now than they did decades ago.

With spiraling fixed costs and little flexibility to increase productivity (the working week is eighteen hours with a maximum of eight services), the rest of the symphony orchestra’s financial model came under extreme pressure.

Isn’t there a contradiction between the assertion that there is “little flexibility to increase productivity” and Flanagan’s finding that the number of concerts has gone up? Absent an increased demand for the services of orchestras, what good is increased flexibility going to do? That’s even assuming, of course, that management requests for flexibility are monolithically resisted by musicians everywhere; that’s sure not been our experience in Milwaukee.

By the way, one of the findings in the Flanagan report little noted by those who see dinosaurs falling from the skies is that the proportion of orchestra budgets that goes to artistic expenses (mostly orchestra compensation, of course) has actually fallen over time.

Back in the 1930’s, the top orchestras could cover 85% of their total budgets through earned income, with the rest at 60%. By the beginning of the 21st century, earned income for the top orchestras was in the 50th percentile, with other orchestras coming in between 45% and 52%. Today nearly all orchestras are in the 30th percentile. This is a reflection not just of the changes within the financial model but also the aggravating effect of declining audiences.

Not necessarily. First of all, there’s nothing sacred about “earned income.” Lots of nonprofits have essentially no earned income at all and manage just fine; it all depends on the mission. Secondly, earned income does not correlate all that well with declining audiences. There’s evidence to suggest that audiences are declining at least in part because managements have aggressively tried to maximize earned income rather than the number of people who actually hear orchestras. At least that’s the theory behind the recent experiments in St. Paul and Detroit with lowering ticket prices.

Since 1982, audience numbers have declined by 29% with the sharpest fall in the period 2002-2008, according to the National Endowment for the Arts Survey of Public Participation in the Arts. To compensate for the decline in box office revenues, orchestras have placed even greater reliance on donations and endowment draws, a particularly tempting stratagem because of the strong growth in private support between 1987-2003. This, is turn, has totally muddled organizational relations and the financial model. It is now the fixed costs of the musicians that drive fundraising activity, and it is compensation enhancements that absorb any increases in fundraising, thus preventing the organization from contributing to its own financial stability. These factors, combined with the very bad habit of taking excess draws from endowment to meet budget shortfalls and exacerbated by the economic collapse of 2008, set in motion a perfect storm that undermines the whole field.

This is so completely backwards that it’s hard to grapple with. First of all, audience numbers and box office figures do not move in parallel, as discussed above. Secondly, orchestras are called “nonprofit” for a reason; that reason is that they need contributed income in order to survive –  and always have. It is not self-evident that this is bad, or that a rising need for contributed income proves anything negative about orchestras. Some very respected managers would argue that it’s a good thing.

And it’s not “the fixed costs of the musicians” that are driving costs up; certainly it’s not the only factor. Why else would the percentage of orchestra budgets going to artistic costs be declining overall? All costs have been going up. It is telling that, in some of the most successful, and best-paying, orchestras, the percentage of the budget that goes to musician is falling fastest. Perhaps there’s something to the old notion that “you’ve got to spend money to make money.”

Would orchestras have been better off if expenses hadn’t gone up? I don’t see why that’s self-evident either. Why would people contribute to an organization that doesn’t need the money? And where would Woodcock have that money go? He doesn’t seem to think much of funding musician salaries, and evidently he doesn’t think endowments are the answer either. Rainy day funds? Good luck with getting people to contribute to those.

Since Boards bear fiduciary responsibility for their organizations, the question has to be asked: what has been their contribution to this situation? Where have they been during all of this? Well, lulled by ever-increasing private support for many years, they have been complicit in sanctioning excessive pay demands, agreeing to excess draws on endowment, and signing off on defined benefit plans which, down the road, became financial monsters of unfunded liability.

The problem with defined benefit plans are that, when massive economic downturns hit, they become underfunded. The same thing happens with defined contribution plans, of course – the difference is who bears the burden of making up the difference between what’s invested and what’s needed to fund a benefit. Evidently the mistake that boards made was not forcing musicians to bear that risk – although, as events have proven, eventually musicians do anyway.

A lot of people, had they known that the Great Recession of 2008 was going to happen, would have made different choices about investments, and business plans, and career decisions. It’s easy for Woodcock to criticize those decisions in hindsight. We might all be better off if we acknowledged, and internalized, that the people who really run this country are going to run it into the ditch every few decades. But, because they do, there is no magic answer for nonprofits that would ensure that they aren’t as stressed by the greed and irresponsibility of our economic overlords as is every other economic entity.

There are no sustainable orchestral models in this country that the field can point to and emulate. There are a few isolated examples of individual success, but this success is the result of a unique set of circumstances that apply only to an individual community. I believe it is the European model that the U.S. can best learn from. The great examples are the London Symphony and the Berlin Philharmonic.

Which are not themselves products of “unique set[s] of circumstances that apply only to an individual community”? Come on. What about LA, and the BSO, and San Francisco, and Chicago – not to mention such stories as Nashville. They look pretty sustainable to me. And I would bet that there are members of the Berlin Phil and LSO that wonder just how sustainable what they’re doing is. They’d be stupid not to be wondering that – and they’re not stupid.

It is time for a thorough reexamination.

What it’s time for is for critics of our field to stop repeating tired old platitudes about “fixed costs” and “inflexible contracts.” Our field has significant problems. Thinking that musicians are the major obstacle to financial health, and that paying them less and working them harder is the answer, is not the least of them. Not only is it false, but it’s a sure path to open warfare between orchestral institutions and the musicians who work for them. And, as we’ve seen in Detroit, that really fixes an institution’s financial problems.