Analysis of the MOA’s 12/21 Letter to the Legislature

Well. When it rains, it pours.

On December 21st, the MOA sent a six-page letter to the state representatives who contacted them on December 6th, asking the MOA for information about their finances. The first page of the reply consists of addresses; the second and third, standard boilerplate taken verbatim from the MOA’s website. I’m not going to bother rebutting the boilerplate here, because I’ve already done so in previous entries, but if anyone from the government is reading this and wants an informed outsider’s perspective about the letter, please contact me at the following email address: songofthelarkblog[at]gmail[dot]com. I will gladly explain to you sentence-by-sentence how and why this letter is misleading. It only tells part of the story, and as lawmakers, I think you deserve to hear a broader perspective. I’ve been covering this story since late August, and I’d be delighted to help you gain that broader perspective, and answer any questions you may have.

The fourth page of the MOA’s letter starts getting more specific…so let’s start our analysis there.

In your December 6th correspondence, you make the following specific requests of the Orchestra:

a. Provide the musicians the current financial documents that they have repeatedly requested.

The Orchestral Association has been transparent with its financial information. Since this negotiation began in April, the Orchestral Association has shared over 1200 pages of information, including the following:

• Audited Financial Statements (2011 and 2012) (The 2012 Audited Financial Statement was released on December 6, the date on which the Board approved it);
• Monthly Finance Committee Meeting Minutes (2009 through 2012);
• Monthly Financial Updates to the Board of Directors and Committees (2009-2012);
• Profit and Loss Reports;
• Contribution Reports (2009-2012);
• Building for the Future Reports (2009-2012);
• Investment Policies and Objectives;
• Information Related to the annual draw from the endowment for fiscal years 2010-2013; and
• Actuarial Report for the defined benefit pension plan

Looks impressive…at first glance. The only problem? These are not the financial documents that the musicians have requested. According to the musicians, this is what they want:

• The 2012-2013 budget
• The FY2012 audit. This may very well have been released to musicians on December 6, but according to them, for months beforehand, the MOA refused to release reports they gave to the auditors. Hopefully a copy of the audit is indeed now in their hands. But the only reason it is is because it was released to the public at the same time. It wasn’t because they were interested in clarifying the situation for musicians.
• An answer to the question “if the ‘substantial decline’ ($15.25m) in contributions and pledges from key staff, Board members, and Board-member influenced organizations between fiscal years 2010 and 2011, was related to these contract negotiations.”
• Oakleaf Trust meeting minutes
• Answers to “a series of questions related to Endowment Fund policies, practices, and projections.”
• A joint independent financial analysis, which, according to the musicians, would “cover an institution’s viability, stability, business plan, strategic plan, the quality of its management, comparative performance, [and] present and future prospects…” It would also “assess current and future trends, opportunities and risks.”

And of course the MOA knows this. They’re just hoping that legislators won’t have the time to dig to find what the musicians really want.

b. Return to the bargaining table in good faith with the musicians and resolve the contract negotiations expeditiously in a way that preserves the public interest and investments in the Orchestra

The Orchestral Association is ready and willing to engage in negotiation discussions. As a matter of fact, we specifically put forward our contract proposal in April, five months before the end of the contract, to allow ample time for discussion.

I think it’s worth reminding people here that way back in September, the MOA released that proposal to the public weeks before the old one expired, without telling the musicians they were going to do so. Needless to say, that’s not acting in “good faith.”

Keep in mind as well that during all these months, the MOA has not moved, or given the musicians the financial information they’ve requested. They might tell legislators that they’ve proposed two contracts, and that’s true…technically. But the second proposal still included about 97% of what they originally wanted. Not much negotiation or compromise happening there.

So no matter what the MOA says, nothing they’ve done over the course of this negotiation has been done in good faith, or with respect. Accordingly, they will need to do much more than send a letter to the legislature to regain the trust not just of the musicians, but of the taxpaying public.

More than eight months later, the musicians have not yet put forward a single counterproposal to allow for discussion at the table. We were very pleased to accept an offer from the federal mediator’s office to get involved: the federal mediator has not yet been successful in encouraging the musicians to come back to the table with a counterproposal either.

First of all, the main reason that the musicians have not submitted a counterproposal is because they don’t have a clear idea of what is happening with the MOA’s finances. (As we’ve already seen.)

Second, a counterproposal is simply not necessary for discussion. It never has been; it never will be. Read what orchestra expert Drew McManus says here. Mr. McManus, a respected consultant and a consummate professional, goes so far as to say that what Mr. Campbell and Mr. Henson are proposing is “a trap.” Once a counterproposal is on the table, it’s possible that could turn the conflict from a lockout into a strike, and that has ramifications, shall we say. Even more irritatingly, until December 21, the MOA was clear that they were not interested in even coming back to the table until a counterproposal was made. (Mr. Campbell and Mr. Davis, on November 28 in the Strib: “The musicians’ negotiating team appears to be avoiding at all costs our request to come back to the table with a substantive counterproposal.”) Now, of course, the MOA has changed their tune, saying there will be “no preconditions” on their proposed January talks. It’s still unclear whether this is a kind of publicity stunt, or if pressure from donors, patrons, and government officials is finally encouraging them to be more transparent. Based on their past actions, I’m going to guess the former…but we simply can’t know yet for sure. Let’s hope the MOA provides all information the musicians request, and that I’m proven wrong.

c. Provide the necessary financial documentation that assures the public that they have not been funding the lockout of the musicians and that no public funds were used to pay costs associated with the management discussion to shutter this premier cultural attraction in our state

The Orchestral Association has not used any public funds to fund administrative expenses of the lockout.

The Orchestral Association has received a total of $641,677 in the State’s current fiscal year in grants from the Minnesota State Arts Board, which in turn came from the general fund and the Legacy fund. These grants are for general operating support. We are extremely appreciative of this funding, as it goes to support a portion of the general operations of the Orchestra, including musician salaries and benefits paid.

Let’s stop right there and get a little clarification as to what the phrase “administrative expenses” means. From WiseGeek:

Administrative expenses are costs that are associated with the management and general functions of an organization and are not directly related to a specific department. Sometimes considered part of general business expenses, these costs can be for basic needs such as rental space for the business, utilities or office supplies. Administrative costs also can include the salaries of people who are not involved in sales, production or other departments within the company, such as senior executives, secretaries and receptionists.

Then, later on the page:

For charities and other [non]profit organizations, administrative costs are often defined differently from the way for-profit businesses define them. In many cases, any money that is brought into the charity organization and spent by the organization instead of being turned into charitable efforts or donations is counted as an administrative cost. Therefore, all of the costs of running the organization, such as for salaries, marketing, rent and utilities, would be called administrative expenses.

And here’s the definition of general operating expenses from the Foundation Center:

grants for the day- to-day operating costs of an existing program or organization or to further the general purpose or work of an organization; also called unrestricted grants

So if I’m understanding correctly, the funds given to the MOA from the State of Minnesota went to general operating support, but not to administrative expenses related to the lockout. So…where exactly is that place? Would it be out of bounds to ask for further clarification? Did all of the public money go to musicians’ salaries? Mr. Henson’s salary? Rent for temporary offices? Did it go into the endowment? If so, where in the endowment? Did any of the money go to the hall renovation? If so, how much? Why? And what is “security” mentioned by the WCCO report? Is “security” an administrative expense? (What does “security” even mean in the context of an orchestra?) As you can see, the definitions get slippery quickly, especially since non-profit definitions can differ from for-profit ones. Some of our non-profit buffs may want to jump into this discussion in the comments. What do you think the MOA could be talking about here? (And as always, MOA, you’re more than welcome to get in touch with me directly… You know how much I’d love to hear from you. I’ve lost track of the number of times I’ve asked for you to respond to my questions over the months…)

d. A full accounting of what funds have been used for marketing the Building for the Future Fund, public relations related to the Fund of the lockout.

The Orchestral Association has relied on distributions from the endowment for costs associated with marketing, public relations and fundraising related to the Building for the Future Campaign and, as noted above, for costs associated with administration expenses related to the contract negotiation. We have worked hard to keep our campaign expenses low. These costs average about 1.5 of our annual fundraising total, compared to an industry standard that is between two and five percent.

I sure hope you’re right. I’m so hesitant to take anything the MOA says at face value. I always feel like there’s a trick behind everything they say, and many patrons feel the same. Needless to say, this isn’t a great position for a non-profit to be in.

e. A transparent representation of how endowment funds have been accounted for in loans and distributions to give the public perception of a balanced budget as Orchestra.

I’m not going to re-type everything that the MOA said in answer to this point, as they went into quite a bit of meandering detail. (It’s quite amazing how much they can say without saying anything at all…) Once again, you can read what they say here. But suffice it to say, not once does the MOA address why, back in 2009, they were planning to run deficits in 2011 and 2012.

From the MOA’s letter:

The Orchestra’s new strategic plan [adopted in 2011] calls for reductions in the rate of endowment distributions and continuing to show a balanced budget from operations would not accurately portray the financial condition of the Orchestra.

No…………..kidding, Sherlock. But isn’t this a tacit admission that showing a balanced budget from operations in 2009 and 2010 also didn’t accurately portray the financial condition of the Orchestra? The MOA can try to pussyfoot around this – cloak this in euphemism – write things on official-looking letterheads – but there’s really no getting around the fact they misled everyone.

This is what the MOA wants you to believe happened: throughout 2009 and 2010, while the economy was in freefall, the MOA was trying to figure out if bad things were happening to their finances (or, in their words, seeking “to better evaluate the depth and likely length of the recession and its effects on all sources of revenue”). As they were evaluating, they increased their draws from the endowment to meet expenses, but didn’t publicize the fact. And not only that, they trumpeted their extraordinary financial health to their patrons, the legislature, and the international press. (If you haven’t already, read this article from 2010: “With orchestras across the US hard hit by the recession – and management strategies the number-one talking point at the League of American Orchestras’ conference in June – the Minnesota Orchestra stands out as a beacon institution among the bad news.” That sentence was on their website until October of 2012, when I called them out on it and they pulled it from their website, without explanation.) But after the request for the $14 million from the State was approved, and after they’d gotten the additional private money they wanted for the Building for the Future Campaign, they finally decided to attack the problem by adapting a new strategy (“a restructured business plan”). Keep in mind that this plan had zero – zero – ZERO – public input…and it’s a strategy that experts from around the country have said will completely decimate the artistic quality of the orchestra. It also was the MOA’s first public acknowledgment that they had a financial problem. Do you really think they were so stupid that they didn’t know there was a problem in 2009 and 2010? Really? No. They knew. There was no reason they couldn’t have been honest with us. And they weren’t. And they don’t even acknowledge the dishonesty in this letter.

They continue:

As noted above, public funds have not been used in this way. For avoidance of any doubt and to give you the assurance you are seeking, the Orchestral Association will immediately sequester in a separate account the funds that have been received from the Minnesota State Arts Board thus far in this fiscal year and will sequester any payments that are scheduled to be made going forward, until the contract negotiation is completed.

What does this do? Who, if anyone, will be overseeing this process? Have any funds already been spent? If so, on what? So many questions…

From yesterday’s MPR article: MN Orchestra re-opens negotiation talks, cancels concerts:

St. Paul DFL Rep. Alice Hausman, chair of the House Capital Improvement Committee, was one of the lawmakers who signed the letter. She supported giving the money for Orchestra Hall, but said it is important that musicians be treated fairly, as without them there would be no orchestra.

Hausman said she was pleased to hear about the sequestering of the Legacy funds.

“Having made that assurance, I personally would say, OK, I would take your word for it, you are going to put it in a separate account,” Hausman said. “And in that case I would probably say no legislative hearing would probably be necessary.”

However, Hausman said upcoming hearings on more Legacy funds for the orchestra will be problematic if the lock out continues.

“If the orchestra isn’t playing, ensuring we can’t send checks there, unless we have some sense that that is only going to be held for salaries for musicians,” Hausman said.

My dear Rep. Hausman, you are so awesome for looking into this, and I’m so so so deeply appreciative, but please, I beg you, don’t make that mistake! This problem goes way beyond if Legacy funds were used to fund the lockout. This is about a CEO misleading the state legislature, saying that his organization has “announced” balanced budgets, and that it is “facing the current economic downturn with stability,” when in fact it was doing no such thing. This is about a major non-profit believing it is okay to pre-plan deficits three to four years ahead of time, in order to be better positioned to get money from the government and wring concessions out of workers. (From the Star Tribune, November 26: ““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.'” A “reset business model” is, of course, code for slashed salary and benefits.)

If Michael Henson and the Minnesota Orchestra management can get away with this, then other leaders will be emboldened. A disease of distrust will start to spread. We must not allow these individuals to set a precedent: this is not the way to do business in Minnesota. A sequestered account, while it may be a step forward, is not adequate. We still need that hearing. We need additional pressure from our elected officials. The public has too many unanswered questions, which the MOA refuses to answer. Keep in mind, not a single representative from the MOA has given an in-depth public interview about what is going on. Not one. This despite the fact that many writers have outstanding requests for interviews, including me, Matt Peiken from MNuet, and Drew McManus. If the only way we can get accountability is through the legislature, well, then so be it: let’s go through the legislature.

On the plus side, I’ve heard that Rep. Jim Davnie (the legislator in the WCCO video) is really fired up about this. A reader showed me a non-auto-reply email she got within a couple of hours of writing him…on Saturday. He said that he will “continue to work on this until the lock out is ended and the musicians return to work.” That’s comforting.

And also, here’s another tiny victory from the MPR article:

Henson said management is also prepared to respond to the musicians’ concerns about recent changes in the orchestra’s mission statement. He said the statement will revert to its original form except for three changes to expand the orchestra’s activities in the community.

So, we’ve restored “orchestra” to the mission statement. That’s…not nothing.

But one does wonder why exactly it was taken out in the first place. And I’m not going to express wholehearted approval until I see the precise wording of the new version of the old mission statement. But it’s…something, I guess. It’s one tiny little bit of movement toward accountability. I’m going to assume it’s a sign of pressure being applied behind the scenes.

So. Anyway. I think the moral of the story is: keep writing legislators. Keep a (polite) drumbeat pounding. They’re obviously looking into this. The pressure is on. But we need to keep encouraging them. A slap on the wrist is simply not enough: we need, and we deserve, accountability. This can’t be allowed to happen again.

Once again, I encourage anyone from the legislature to contact me at songofthelarkblog[at]gmail[dot]com if you want to speak privately about any of this. I’ve written about this conflict since late August, and gotten international attention for doing so. If I don’t know the answer to something, I will know exactly the person to direct you to. Trust me, I have lots of questions for Mr. Henson and Mr. Campbell. I’d be delighted to pass them along to you.