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Matovich C u9 Financial Condition Analysis Christine Matovich Unit 9: Project Part 6 Oregon Symphony, Financial Condition Analysis AAD 610 Financial Planning for Arts Organizations Prof. Dr. Rachel Shane March 12, 2014 The Oregon Symphony consistently lives up to its mission statement, which is to “Inspire a love and understanding of music in our lives by bringing great music to all." For the 2012/2013 Season, it provided music to 225,000 audience members.1 However, the financing of both its Program Services and overall operating costs do not reflect a financially sustainable execution of its mission. In 2008, The Oregon Symphony used a large portion of its unrestricted Endowment to pay down mounting debt and additionally took a bank loan. The necessary use of the unrestricted and temporarily restricted portion of the endowment, the loan, and a strategic financial plan, have resulted in some financial growth in revenue. This growth is reflected through Program Services, repaying its bank loan, reporting an increase in cash reserves, keeping administrative costs down and significantly reducing the deficit of its unrestricted assets. Even with these positive gains, grants, fundraising efforts and contributions remain static as of now. The organization continually uses its unrestricted assets to pay for its expenses that are chronically more than its revenue. The Oregon Symphony needs to demonstrate both will and competence to simultaneously build its Program Services revenue and significantly cut its expenses. Once both are demonstrated, the Symphony could potentially attract new and necessary contributions. The biggest obstacles to growing necessary funds are the Symphony’s inability to cut costs and maintain a core endowment. This paper will primarily utilize data from both the five year Trend Analysis and Financial Indicators from 2009-­‐2013 to analyze past and current earnings and expenses and provide recommendations for fiscal solvency About the Symphony Located in the Arlene Schnitzer Concert Hall in the Portland Center for the Performing Arts, The Oregon Symphony, under Music Director Karlos Kalmer, is one of the oldest and most established symphonies in the United States.2 It has been in (almost continuous) operation since 1866.3 It offers excellent program services that are appealing to a wide diversity of tastes with music of various genres; excellent community outreach in education and to rural areas; summer programs; a secondary home in Salem; renowned visiting artists such as Hillary Hahn and Zakir Hussain; a great subscription series and above all 75 highly talented musicians who consistently deliver music of the highest caliber. 1 Oregon Symphony, Quick Facts, http://www.orsymphony.org/about/quickfacts.aspx, 2012/2013 (last accessed March 15, 2014) 2 Oregon Symphony, History, Carlos Kalmer, http://www.orsymphony.org/about/history.aspx (last accessed March 15, 2014) 3 It is to note that they did close during the Great Depression. This information is found via the url on the above links. 1 Matovich C u9 Financial Condition Analysis Trends and Financial Indicators The largest impact in investments, and therefore net assets, was the use of a significant portion of its endowment in 2008. In looking at Line 10, Form 990, Net Assets, the highest total assets were in 2006, up $10 million from 2005. The assets, at their peak in the eight-­‐year trend, were $26 million in 2006. Mounting costs and expenses, compounded with the economic recession caused donors to stop donating, or give nominally while program services still continued at pre-­‐recession levels. 1 Many other symphony orchestras at the time also needed to spend portions of their savings, which meant using unrestricted, temporarily restricted or permanently restricted funds and/or take loan(s). 2 Oregon Symphony was no exception. The chart below illustrates its Net Assets and trends from the pre-­‐
recession period through 2012. 1 International Finance Class 2009, University of Mary Washington, http://2008financialcrisis.umwblogs.org/the-­‐recession/ 2009 2 Other symphonies researched reflecting similar expenses and loss of assets are Los Angeles Philharmonic and New York Philharmonic. It is to be noted that the Forms 990 for LA Philharmonic and the New York Philharmonic, during the years of the recession are not available on Guidestar. Forms 990 for years 2006 and 2007 will already show the decline in net assets and revenue. Los Angeles Philharmonic, Form 990 2010, http://www.guidestar.org/FinDocuments/2010/951/696/2010-­‐951696734-­‐077a1763-­‐9.pdf, guidestar.org (Accessed March 12, 2014) New York Philharmonic, Form 990 2008, http://www.guidestar.org/FinDocuments/2008/131/664/2008-­‐131664054-­‐0538f78e-­‐9A.pdf, guidestar.org (Accessed March 12, 2014) New York Philharmonic, Form 990 2007 http://www.guidestar.org/FinDocuments/2007/131/664/2007-­‐131664054-­‐046a96f0-­‐9.pdf guidestar.org (Accessed March 12, 2014) 2 Matovich C u9 Financial Condition Analysis 2012 2011 2010 2009 Total Expenses 2008 Net Assets 2007 2006 2005 $0 $10,000,000 $20,000,000 $30,000,000 With such a significant reduction of its endowment, the Symphony has lost substantial investment revenue, generated from permanently restricted, temporarily restricted and unrestricted assets. This has reduced its ability to invest in either fixed assets or additional programming. The intent of the endowment is not to pay down debt. While prudently using the endowment to cut expenses and debt, the Symphony simultaneously lost revenue by sacrificing growth of principal, funds for investment and interest. As the charts above and below demonstrate, its expenses, from 2009, are consistently higher than its assets. Based on the 2006 Form 990, we note that it received an additional endowment/donation, of $10 million at this time. This $10 million appears to be completely restricted which is reflected in the chart above and the charts and ratios below. In order to best understand its current situation it was necessary to go back eight years to see the trend of the “bottom line”. Only in 2007 was the Symphony able to demonstrate higher revenue over expenses. While the deficit is apparent, each year the amount of loss is different. Given the large drop in total revenue in 2009 of over $4 million, there is an apparent additional amount given, surmised to be an emergency endowment, in 2005/2006. Without a detailed list of accounts payable throughout the trend (accumulated debt) it is difficult to know why it reflected an increase in funds and what were the restrictions placed on those funds. What remain consistent, (aside from 2007) however, are higher expenses versus revenue. 3 Matovich C u9 Financial Condition Analysis 2012 2011 2010 2009 Bottom Line 2008 Total Revenue 2007 2006 -­‐$5,000,000 $0 $5,000,000 $10,000,000 $15,000,000 Total Expenses $20,000,000 Further current financial analysis is to study the trend of earned and unearned income. To better understand the impact of the current trend of earned and unearned is to look at the financial state of the Symphony in 2008 and measures taken to address it. The context of both the Symphony’s earned and unearned income, also is linked to necessary cost reducing efforts by their former president, Elaine Calder, through cutting the staff by 30%, cutting symphony size by removing 10 musicians, and cutting 20% of their programming.1 While sound—when matched to the spending of the endowment—the expected spike in unearned income didn’t materialize. This financial decision, matched with the spending of the endowment has a direct impact on the earned and unearned income. While it is preferred that the unearned amount be significantly higher than the earned, an indicator that overall donations are high, the money mix for Oregon Symphony appears to be 50/50 of earned and unearned differential and not the desirable 20/80 rule of earned to unearned. The Symphony, given its current financial position should demonstrate a higher level of unearned. 1 Barry Johnson, “The Elaine Calder Interviews”, orartswatch.org, Aug. 23, 2012, www.orartswatch.org/the-­‐elaine-­‐calder-­‐interviews-­‐two-­‐parts-­‐both-­‐audio-­‐and-­‐transcribed/ (Accessed Feb. 24, 2014) 4 Matovich C u9 Financial Condition Analysis The following table will illustrate this trend based on three years. Year Earned Unearned Percentage Difference 2008 50% 49% 1% 2009 44% 56% 6% 2013 46.40% 53.60% 7% (approx.) Mission Based Financial Activity While it is difficult, currently, for Oregon Symphony to find additional funding, based on its high expenses and the spending of the unrestricted and temporarily restricted amount of the endowment, it still adheres to its mission through its Program Services. A look at its Program Service Expenses will show that a majority of funding is spent on programming. From 2012 to 2013, based on total expense allocations, the Symphony spent 78% of its revenue on Program Services. While this percentage of spending is necessary, meets benchmarking standards for arts nonprofits1 and receives high marks with the IRS, the current overall positive trajectory of the Program Service revenue is not enough to reduce its expenses. Program Service Revenue vs Total Progam Service Expenses $14,000,000 $12,000,000 Axis Title $10,000,000 Total Program Service Revenue $8,000,000 $6,000,000 Total Program Service Expenses $4,000,000 $2,000,000 $0 2011 2012 2013 To note, the average deficit between Program Service Revenue and Program Service Expenses is approximately $4 million annually. The Program Expenses overages, and 1 Shane, Prof. Dr. Rachel. “Prezi: Unit 9, Financial Statements: Independent audits for arts organizations and all related material”, University of Kentucky Online Course AAD 610, Financial Planning for the Arts. March 8-­‐14, 2014 5 Matovich C u9 Financial Condition Analysis overall overages have not reversed their trend since 2006 and could be a major factor against attracting new contributions. The following chart is based on the five-­‐year trend analysis and illustrates an almost stagnant growth in contributions. To note, its Consolidated Statements of Activities, page 10, #3 states, “At June 30, 2013, 56% of total pledges are due from two donors. (Correspondingly, in the previous year: “45% of total pledges are due from two donors at June 30, 2012”). The chart below does show growth for 2013. However, this is due primarily to the pledges from the two donors mentioned above (it should be noted there is no evidence the two donors in each year are the same). This does not indicate a strong donor base for fiscal solvency. Contributions 2013 2012 2011 Contributions 2010 2009 $0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 The following paragraphs will focus on liquidity and solvency. Using primarily financial indicators for 2012 and 2013, both short term and long term financial health will be analyzed. Short Term Financial Health: Liquidity Working capital is found in Part X, Form 990 • Current Assets: Lines 1-­‐4 • Current Liabilities (not reflecting current portion of charitable gift annuity liability found on the 2012/2013 Financial Statement): Lines 17-­‐20 • Subtracting current liabilities from current assets o Working Capital: $72,468 6 Matovich C u9 Financial Condition Analysis Based on this finding the organization does not have enough working capital to cover its current expenses for 2013. Current Ratio divides the current assets by current liabilities (musical instruments are not included in this ratio). • Current Ratio: 1.02 (with instruments 1.09) Based on our readings on what reflects an organization’s financial health, a ratio of 1 or over is recommended.-­‐The Current Ratio reflects that Oregon Symphony is borderline, and based on the financial statement it is dipping into assets to pay off its current debt. The final ratio reflecting short-­‐term financial health is the Cash Ratio. Cash Ratio: cash equivalents/current liabilities • Part X, Line 1 cash and cash equivalents o 2012 62 o 2013 52 It is advisable to see a ratio of over 1. Based on this ratio it will not be able to pay its debts . They may need to use unrestricted assets again. Long-­‐Term Financial Health-­‐Solvency Debt to asset ratio: Total Liabilities/Total Assets Part X Lines 17-­‐25 Total Liabilities Part X Lines 1-­‐15 Total Assets o Solvency 2013 248 o Solvency 2012 235 Asset-­‐to-­‐liability ratio: Total Assets/Total Liabilities Part X Lines 1-­‐15 Total Assets Part X Lines 17-­‐25 Total Liabilities o Asset to liability 2013 4.02 o Asset to liability 2012 4.25 Without earning any additional income, Oregon Symphony only has 4 years of solvency left. 2012 and 2013 reflects that it has already lost .23. While that may not seem significant, it does reflect an imbalance, and liabilities are increasing. The Deferred Revenue of $3,192,888 as part of the total liabilities in 2013 of $3,595,588, of which 56% is from two donors, does not indicate solvency, even though it results in increased assets.1 Pledges due for 2012, less 4% for depreciation, were collected upon-­‐this is easily done when only two consistent donors are involved. Lacking a larger pledge base, it is not possible to conduct a ratio on unpaid to paid pledges. To note as well, deferred income of individual tickets and subscription sales are fully refundable. 1 Oregon Symphony Financial Statement Report 2013, page 10, #3, http://www.orsymphony.org/about/financials/2013_OSA_Financial_Statements.pdf. Orsymphony.org (Last accessed March 11, 2014) 7 Matovich C u9 Financial Condition Analysis Recommendations Oregon Symphony is spending its unrestricted endowment to cover its expenses. This is done by converting the temporarily restricted endowment into unrestricted, board allocated/released funds, and by having a couple of “angel donors” keep its bottom line from appearing as low as it actually is. While it was necessary to pay down its debt with both a loan ($6.9 million-­‐paid off in full) and unrestricted funds of over $8 million, the Symphony has decreased its capital to make further investments that are deemed necessary at this time in order to sustain the organization. Based on the precarious financial situation of the Oregon Symphony the following recommendations are proposed: • Expenses must be decreased to cease the spending of unrestricted endowment.-­‐It must operate within its means. o Decrease program costs  What programs are not financially viable and what programs are more viable and show growth o Re-­‐negotiate lease terms and find mutual incentives for renewing the lease o Invest in a partial purchase of the concert hall for shared rentals • Hire a strong new president. The lack of leadership does not instill confidence in current and potential donors o Restructure the current Strategic Plan as implemented by Elaine Calder • Increase fixed assets to provide more liquidity and solvency. Almost all equipment is depreciated. o Given low liquidity ratios, a campaign is suggested for in-­‐kind donations for cost elimination and asset growth o In kind contributions should include but are not limited to: all new computers, office equipment, furniture, office supplies, and ideally free rehearsal space, instruments (could be used for rental) and land o Invest in its own rehearsal space that could also generate unrelated funds through rentals • Look to cost elimination of products and services through in kind contributions and volunteers • Cost elimination of fundraising events through underwriters, co-­‐branding contributions and sponsorship • Build and re-­‐build donor base o Work with the Board and Symphony Association to attract new donors and encourage former donors to come back via matching grants, pledges, drives, community incentives-­‐this drive should be for Portland and the surrounding areas and Salem • Market to its strengths to increase audience base and attract another foundation grant for principal investments through a strategic action plan to simultaneously build fixed assets, contributions, investments and dividends, to have financially sound liquidity and solvency both short and long term. 8 Matovich C u9 Financial Condition Analysis •
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o Upgrade the website to be more appealing and informative with musician bios, live recordings, interviews and audience feedback and surveys Create as much positive press as frequently as possible on current and future programming with emphasis on its excellent selection and solvency-­‐and focus on its professional consistency and history as a symphony since 1866. As necessary re-­‐iterate that the Symphony never spent restricted funds, or post this on the website. Generate positive press if possible in the financial media. Have senior members of the board and administration attend conferences for arts administrators on strategic planning and current practices Conclusion In analyzing the past and current trends of the Oregon Symphony it is evident that it is in financial difficulty. The Trend Analysis and the Financial Indicators reflect that both its liquidity and solvency are not at the necessary levels for growth and sustainability. The five-­‐year Trend Analysis, based on IRS forms 990, neither fully provided an accurate analysis of the large drop in funding from 2008-­‐2010, nor clarified the large increase of funding in 2006. What it did convey is that before the recession, Oregon Symphony was already overspending and was running into financial difficulties earlier with no substantial Endowment in 2005. In addition to spending the unrestricted portion of the Endowment they did take a loan of $6.9 million that has been repaid. Also, to date, the Symphony has almost erased its unrestricted asset deficit. Regardless, it is still overspending annually on program expenses. Without decreasing these expenses and ceasing to use its endowment to pay off debt, it will not attract the necessary donors, without whose support the organization will not be able to survive beyond a few more years. 9 Matovich C u9 Financial Condition Analysis Appendix A Trend Analysis 2008-­‐2012 Continued on next page… 10 Matovich C u9 Financial Condition Analysis Appendix B Financial Indicators 2008-­‐2013 11 Matovich C u9 Financial Condition Analysis Appendix C Bibliography Bibliography Blazek, Jody. Nonprofit Financial Planning Made Easy, John Wiley & Sons. Inc., Hoboken, New Jersey 2008. Bhupesh Upadhya, CFO American Embassy School New Delhi, Interview, March 10, 2014. Dr. Rachel Shane, conference call, March 11, 2014. Barry Johnson, “The Elaine Calder Interviews”, orartswatch.org, Aug. 23, 2012,www.orartswatch.org/the-­‐elaine-­‐calder-­‐interviews-­‐two-­‐parts-­‐both-­‐audio-­‐
and-­‐transcribed/ (Accessed Feb. 24, 2014). Oregon Symphony Forms 990 2006-­‐2012, http://www.guidestar.org/ReportOrganization.aspx?ein=93-­‐0446527, guidestar.org (Last accessed March 12, 2014). Los Angeles Philharmonic Forms 990, 2007-­‐2008, http://www.guidestar.org/FinDocuments/2008/131/664/2008-­‐
131664054-­‐0538f78e-­‐9A.pdf, (Accessed March 12, 2014) http://www.guidestar.org/FinDocuments/2007/131/664/2007-­‐
131664054-­‐046a96f0-­‐9.pdf , guidestar.org (Accessed March 12, 2014). New York Philharmonic Form 990, 2010 http://www.guidestar.org/FinDocuments/2007/131/664/2007-­‐
131664054-­‐046a96f0-­‐9.pdf, guidestar.org (Accessed March 12, 2014). Oregon Symphony Financial Statement Report 2013, http://www.orsymphony.org/about/financials/2013_OSA_Financial_Stateme
nts.pdf., Orsymphony.org (Last accessed March 11, 2014). International Finance Class 2009, University of Mary Washington, 2008 Financial Crisis and Global Recession, http://2008financialcrisis.umwblogs.org/the-­‐recession/, 2009. 12