Minnesota Orchestra's board walked thin line on finances

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.

Questions about orchestra finances have become a sticking point in labor talks with musicians, who were locked out Oct. 1 after rejecting a management proposal. Musicians have demanded an independent financial analysis of the orchestra. Management has provided 1,200 pages of information, including meeting minutes, that give a detailed look at decisionmaking at the state's largest arts organization.

Major capital campaign

Several issues were at stake between 2009 and 2011.

The orchestra was in the midst of a capital campaign to remodel Orchestra Hall, launch artistic initiatives and build up its endowment. Showing balanced budgets would enhance the orchestra's image with individual and corporate donors and with the Minnesota Legislature, which in 2010 was asked to consider a $14 million bonding request for the building project.

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."

Musicians have wondered why the orchestra is asking to cut their base salaries by about 32 percent after it had balanced its budget for four years before announcing a deficit in 2011.

"These minutes give more credence to our call for the necessity of a joint, independent financial analysis," said Tim Zavadil, who heads the musicians' negotiating team. Asked if he thought the board had engaged in wrongdoing, Zavadil said, "I don't know. I think we could get that from an honest, independent third party."

The musicians are not alone in their questions. Cy and Paula DeCosse, major donors to the orchestra's Building for the Future Fund, asked in a MinnPost commentary why management is "only now tackling deficits that have been mounting for three years?"

The orchestra's own annual reports show that budgets had been balanced through higher and higher draws from its endowments -- from 7.5 percent in 2008 to 11.4 percent in 2010.

State Sen. Scott Dibble, DFL-Minneapolis, who championed the bonding request, said he was not disturbed that the orchestra had been balancing the budget with larger endowment draws.

"No, not on the face of it," he said. "It would depend on the nature of the deficit, how serious it was; is it indicative of management troubles or an unstable organization? In the recession, nonprofits were doing lots of things to address operating deficits."

From robust to distressed

The chatter was sweet and optimistic when the Minnesota Orchestra held its annual meeting in December 2007.

The first balanced budget in several years was reported, the endowment had reached an all-time high of $191 million, ticket revenue and contributions were up. So secure was the board's sense of the future that it had just signed a deal to raise musicians' salaries 25 percent over five years. The orchestra was entering "a new Golden Age," gushed outgoing Chairman Paul Grangaard.

Thirteen months later, the luster had dimmed. The 2008 market collapse coincided with declining revenue and increased labor costs.

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 million."

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

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.

Some board members have suggested that the generous 2007 musicians contract was a mistake. Campbell disagrees.

"When the last contract was signed, the stock market was at an all-time high and lots of leaders thought growth would continue," he said.

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.

At the same time, musicians were being told that hard times were coming, although Zavadil said he did not get the feeling the situation was so dire.

"I'm not sure we were ever told how big this cliff was going to be," he said. "We had no idea that a 30 to 50 percent pay cut was going to be on the table."

Graydon Royce • 612-673-7299