What We Know About Minnesota Orchestra’s Finances – and What We Don’t, Part I

There is an old stereotype that artists are terrible with numbers. Many enforce the stereotype (me, for instance), while others defy it. Happily, Mary Schaefle defies it, and she is today’s guest blogger!

Mary is a Twin Cities nonprofit professional and community violinist. You may have seen her name in the comment section here at SOTL, on Facebook, or on the Musicians of the Minnesota Orchestra’s website. I highly recommend reading the two letters she sent to Minnesota Orchestra management; you can find those here and here. I’ve been staying away from too much in-depth analysis of numbers, because I obviously don’t know much about non-profit nitty-gritty. Happily, however, Mary does, and she offered to take a look at some of the public documents discussing the Orchestra’s finances, so that we might at least try to figure some of this stuff out on our own. Hey, if management isn’t going to answer our questions, what else are we supposed to do?

You can take a look at some of the forms she refers to online. Unfortunately I can’t link directly to them, but if you sign up for a free account with Guidestar, and look up the Minnesota Orchestral Association, you can download some of the documents she mentions. If you have any questions or refutations to make, the comment section is open, and Mary will answer you directly, and I will edit the original article as needed. How’s that for service? I’d be so delighted if management would do the same for us, but for some reason that’s too much to ask… Anyway. Many thanks to Mary for contributing such an interesting piece. I hope we get some answers to the questions she raises, and soon.

***

Minnesota Orchestra’s management has told us they are making “difficult and necessary decisions” and can only spend what they earn. So what do we know about the Minnesota Orchestra’s finances? Tax returns and audited financial statements give us some answers, but unfortunately more questions. There will be plenty of numbers in this post, but I’ll try my best to explain terms.

Remember that I’m not an accountant and certainly not a CPA. I am a person who cares deeply about the Minnesota Orchestra, and who likes to dig through nonprofit tax returns and financials. They can tell you a lot about the organization as long as you have a lot of time and either a translator or a basic understanding of nonprofit finance.

Endowment Income – Is That the Problem?

Management has pointed to the 2008 recession and the resulting decrease in endowment revenue as a key problem. The Orchestra’s endowment lost $12.9 million that year (reported on the 2008-2009 tax forms which are available at Guidestar). They’ve since experienced modest gains of $6.3 and $5.6 million (990, Schedule D, Part V).

But endowment challenges are much larger than a one-time decrease in size. Organizations assume they will receive a certain amount of income from the endowment each year. Those estimates can be conservative, assuming smaller returns, or they can be wildly optimistic. Looking at the Orchestra’s strategic plan, those 2008-09 investments were projected to be $201.4 million. The actual assets were $135.3 million, a difference of $52.2 million before the market tanked. The $12.9 million loss was piled on top of that. The 2007 projections are somewhere between overly optimistic, flawed, and just plain wrong. Perhaps this was the genesis of the financial problems.

Let’s get to how that impacts us today. Back in 2009, our endowment “paycheck” was lowered by 13% compared to our projections. Then things got even worse and our 2012 “paycheck” is expected to be 45% lower. They know the 2007 projections are wrong, but just keep using them. Why do they appear in the 2011 Strategic Plan? Do management and the Board have a new set of projections for future years? A review by an investment analyst, which is typically not part of an audit, is needed.

The Endowment Draw and Two More Questions

Comparing tax returns to media statements and the Minnesota Orchestra website raises two more questions. The draw on the endowment (the income or “paycheck” I mentioned above) has been excessive according to management. They are correct that a 19% draw could deplete the endowment in just over five years. That one is simple math.

According to our friend the 990, the endowment distributions (read “draw”) were 16.3%, 9.4% and 7.8% from 2008-09 through 2010-11 (Schedule D, Part V). As I pointed out in the comments section of Emily’s earlier post on the endowment, the draw amounts released by Minnesota Orchestra do not match their tax forms. That means percentages are off as well. Yes, we once again need that accountant.

Now onto an item that – at least for me – is really troubling. Audited financial statements list “Board Designated Draws from Investments” in the Statement of Operating Activities. Think of this as the amount taken from the endowment (draw) to support concerts, education programs and the day-to-day business of an orchestra (operating activities). In 2008-09 and 2009-10, amounts reported on the financial statements are fairly close to those on tax forms.

But the difference in 2010-11 is just over $6 million. You read that right. The Board withdrew $12.1 million from the endowment, but only $6 million was used to run the Orchestra. I’ve scoured the financial statements and don’t know where the remaining $6.1 million was spent. The money was used somewhere – but where? Financing long-term debt? Expenses related to the Hall renovation? Why did the Board and management decide to withdraw such a large amount in 2011 and only use half for the operations of the Orchestra?

Now is a great time to reiterate that I’m not a CPA. A clarification from an accountant would be wonderful. Perhaps closer to necessary.

For those who like to verify my figures, unfortunately the audited financial statements are not available on the Orchestra’s website or on Guidestar. I’d suggest requesting a copy from the Minnesota Orchestra.

Turning To Investments

Minnesota Orchestra owns plenty of stock. In the 2010-11 and 2009-10 years, Minnesota Orchestra reported gains (or income) of $7.8 million and $2.8 million when they sold securities (Form 990, part VIII). We don’t exactly know how that income was used, but I think we can all agree that bringing in more money is a good thing.

Unfortunately, 2008-09 is again the spoiler. The Orchestra sold a large amount of stock at a $13.9 million loss. It is well known advice to buy stocks low and sell high, and the 2008 market was low as a contrabassoon. It’s possible the stock was on its way to becoming a penny stock. But why would they own such a volatile, risky stock? It could be a bad decision or bad investment advice – to the tune of almost $14 million. I know you’re ready with my next line. A review by an investment analyst would certainly help explain some things.

The Wrap-Up…And More Numbers Coming

For those who’ve stuck with me through this post, you might wonder why I spent so much time and effort on the endowment. It’s because the Orchestra’s management emphasized the shrinking endowment as a key factor in sending their books into the red. So far we’ve confirmed the endowment decreased during the recession. But we’ve also looked at faulty estimates, endowment draws not matching tax returns, some bad investment advice, and an endowment draw where only half the funds go to the work of the Orchestra. If you came here for answers…well hopefully the title gave you a hint.

There are other problems cited by management, including declining ticket revenue, musicians’ salaries, and donors’ restrictions on their gifts. But that means digging into the financials, tax forms and media statements again. Trying to digest too many numbers at once jumbles everything for me, so I’m going with manageable chunks. Check in later for the current state of Orchestral Apocalypse (thank you, Emily, for what you’ve been doing!) and for a few more facts and figures.

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You’re welcome, Mary, and thank you!

So…what do you think? I’m in absolutely no position to judge; this kind of stuff is way beyond my personal sphere of expertise. (I do, however, trust Mary.) Are there any experts out there who can help to shed some light on what’s going on? Have any other patrons been looking at the documents that Mary references? If so, what did you find? Now would certainly be an excellent time to hear directly from the MOA…

You can read Part II of Mary’s series here.

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16 Comments

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16 responses to “What We Know About Minnesota Orchestra’s Finances – and What We Don’t, Part I

  1. “Orchestral Apocalypse”– we might also call this “Minnegeddon”. :-0

  2. A few weeks ago (maybe a month now…?) I said Minnesota Orchestra management could be embezzling money, or doing some sketchy stuff….

    Well, thanks Mary, you have given more reason to believe that. Between utilizing BLATANTLY destructive finance planning and $6,000,000 just disappearing, yeah, looks like some sketch stuff is going on.

    absolutely despicable. I’d like to see someone sue Michael Henson’s a$$ out of Minneapolis.

  3. Anon

    Interesting. Seems I’ve missed a few updates/posts. Great posts Mary and Lark. Have any of you gotten into contact with the musician’s union representative?

    Management are going to take the position that stalling for time is the better way to go in contract negotiations as doing that usually weakens the position of the employees for obvious reasons (they have bills to pay after all) so they are going to do the royal run-around for as long as they can. And obfuscation is a tactic enabling that strategy.

    Getting the word out in support of the musicians is sooo huge under these circumstances and it allows you to use the management’s stalling tactic against them. The longer they stall, the more time you have to rally support for the musicians (and they for themselves), so keep it up!

    • Mary Schaefle

      Anon, my earlier letters to the Board and Mr. Henson are posted on the musicians’ website. And Song of the Lark posts have been shared several times on the musicians Facebook page. So we are there..and will keep asking questions!

    • Yup, I believe they’re trying to stall AT LEAST until after the hall re-opens in summer (or, last I heard) fall 2013. No joke. I’ve seen nothing to indicate otherwise.

      I trust that union representatives are here, since this blog has been linked to numerous times on their Facebook page. (It’s also been praised on the front page of the Pioneer Press, and in The New Yorker’s Alex Ross’s blog, so if management isn’t reading, they’re even more incompetent than I thought…) I also have hope that other community leaders are taking a looksie….

      • Matthew Probst

        I see signs that they mean to stall until enough musicians leave that they can fold the orchestra. I see no evidence that they even _want_ a resident orchestra in the city, as long as they can rent another orchestra to show up often enough to appease the donors that were expecting some orchestral concerts out of this.

        There’s really no other reason to deny all the various mechanisms for reconciliation, that the musicians have offered. They _want_ the orchestra musicians to make a counteroffer without correct figures, because then they can hide behind their obfuscations and say that it just wasn’t enough compromise, and would you please go elsewhere for a job.

        Well, maybe they have a good reason. But I operate now under the assumption that they are working to destroy the orchestra in a way that nobody can point straight at them and yell “fraud” as regards the donations given them between 2010 and now.

  4. Tamara

    Whoa. Six *Million* dollars is a lot of money.

  5. bfelt

    Did some of the six million go to the Peavey Plaza Revitalization Project? I heard that the MOA helped to fund the initial stages of the project.

  6. Mary Schaefle

    Bfelt: It’s possible it went to Peavey Plaza or something else. We don’t have any way of knowing the answer to your question. My point was the endowment draw typically supports current operations, meaning the current season. Only half of the draw went to current operations (this is 2010-11). The Board can designate the $$ for other expenses. I expected a note in the audited financial statements since $6 million (or half of the draw) is significant.

    • That seems totally insane to me.

    • The players have seemed to typically leave the money-matters to Management. I certainly hope that they make staying on top of all this a priority so that they are never sandbagged again — even if management should change and it seems as though their interests are being looked after. This isn’t the way it’s supposed to be; but that doesn’t really matter.

  7. Isabelle

    I just want to say thank you for doing this. I am doing a school project on the topic, and this has been really helpful.

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