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March 9, 2011

Out of tune

Louisville Orchestra management and musicians clash over financial discord

This past Feb. 19 was a highlight of the concert season for the Louisville Orchestra. Ensconced in the elegant Palace Theater, the orchestra provided expert backing for Broadway chanteuse Bernadette Peters. The songs were mostly old standbys, and you could say the same for the audience. Even so, it was a spirited, well-attended event. The orchestra sounded superb, and for one night, you could almost forget this is an organization that has repeatedly been on the verge of bankruptcy. Almost.

Pausing between songs, Peters praised the orchestra and thanked the audience for supporting it. “Food feeds our bodies,” she said, “but the arts feed our souls.” The remark prompted an enthusiastic response from the crowd.

Yet the positive reaction could not mask the fact that as it approaches its 75th season, the Louisville Orchestra is on the brink of bankruptcy once more. Despite a sterling, longstanding international reputation, the orchestra has long been plagued by financial troubles. It knocked on the door of Chapter 11 in 1997, 2003 and 2006. In December 2010, the orchestra’s management finally declared Chapter 11 only to have the petition denied by a bankruptcy judge.

Exactly why the orchestra is perennially so discordant depends on whom you ask — orchestra management and musicians are poles apart when they cite the causes for the red ink and what to do about it. To combat insolvency, management wants to cut the 71-member orchestra down to 55, putting its payroll in line with finances. The musicians rebut that cuts should be the last thing considered. Instead, they want increased fundraising and more gigs.

All agree the orchestra is technically excellent, but beyond that, there is disharmony about how to regain financial stability without sacrificing quality.

The most recent standoff began on Oct. 26, 2010, when Charles Maisch, president of the orchestra’s board of directors, wrote a letter to members of the Louisville Orchestra Musicians Association. In it, he elucidated the orchestra’s troubled financial past, which includes a history of bequests, bailouts and borrowing. Average annual cash receipts have been $5.75 million over the past five years, while costs have averaged $7.3 million, a gap of nearly $1.6 million. And while cost-cutting measures were put in place — including rent subsidies, staff reductions and administrative mergers with the Kentucky Opera and Louisville Theatrical Association — it’s not enough.

To make the orchestra solvent, Maisch suggested providing a one-time retirement incentive package to qualified staff and musicians; the details of the incentive were not defined. The ultimate goal was to employ 55 full-time musicians, cutting 16. He wrote that 55 musicians is the average salaried base for orchestras with $8.5 million annual budgets. The number of weeks worked also would drop from 37 to 31, eliminating one week of paid vacation, one spring service week, and the month of July.

The musicians union had proposed a unified fundraising campaign to solicit contributions and sell tickets; the financial impact would have been $600,000 if matching donations could be secured. The board was grateful for the offer, but Maisch suggested that more revenue without cost cuts would only delay the inevitable.

On Dec. 2, orchestra management declared Chapter 11, i.e. reorganization. (Chapter 7 means closing shop.) At the time, the orchestra claimed it could no longer pay a host of creditors, in addition to its musicians. These included The Kentucky Center, the Galt House, The Courier-Journal, and, full disclosure, LEO Weekly, among many others. The musicians contested this, and the case went to U.S. Bankruptcy Court in Louisville. On Dec. 29, Judge David Stosberg denied the bankruptcy claim, saying the orchestra failed to show “irreparable harm.”

So for now, the musicians are being paid, according to Robert Birman, CEO of the Louisville Orchestra. Annual fund contributions and generous anonymous gifts have financed some of this, but the majority has come from advances from two endowments that support the orchestra: the Louisville Orchestra Foundation and the Philharmonic Society. The former advanced the distribution it was supposed to make at the end of May, totaling $390,000. The latter advanced $80,000.

But these advances are no panacea, as this cash was intended for next season’s operations. “What this means is that in the near term, we are mortgaging a piece of our future to finish the current season,” Birman tells LEO Weekly.

One look at the orchestra’s books confirms this is indeed an organization in deep financial trouble, a situation made worse by the recession: In 2010, its total assets were $10.8 million, down $3 million from 2008, according to a review of annual reports. Meanwhile, its liabilities rose from $677,000 to $1.2 million, while ticket sales and related revenue fell 28 percent, from $3.2 million to $2.3 million. Total revenues and support totaled $6.13 million in 2010, down 24 percent, or nearly $2 million from 2008.

It’s a similar story when it comes to donations and fundraising: Between 2008 and 2010, corporate donations dropped 18 percent, from $594,000 to $478,000, the orchestra’s capital campaign slumped 38 percent, from $1 million to $618,000. Total contributions, grants and donations fell 20 percent, from $4 million to $3.2 million.

Another key area hit included bequests, i.e., large gifts from individuals, often upon a person’s death. These totaled $484,000 in 2008 and just $1,328 in 2010.

One of the few bright spots is the fact that total expenses also are down from $7.9 million to $7.2 million, a reduction of 8 percent.

CEO Birman sees this freefall as evidence the orchestra cannot continue as is. “My contention is that we, as an institution, have been adept at addressing symptoms, but not problems,” he says. “Healthy organizations do not rely on bequests to balance their books … One-time gifts have been masking the orchestra’s imbalances for decades, and by complete coincidence, they stopped just as the recession began.”

The main imbalance, he reiterates, is payroll, as it is a fixed or even increasing cost while revenues vary.

Orchestras throughout the United States are facing similar problems, Birman says, including increased competition for entertainment dollars and inflexible operating models. “Nearly every orchestra in our budget class in America has very large debt loads and insufficient endowment funds to consider themselves stable.”

To forge ahead, Birman touts a program called VISION, which he explains will be a collaboration between musicians, management, the board and community volunteers. Although reluctant to provide specifics about what VISION is just yet, he says when it launches, it will boldly re-imagine the orchestra’s relevance in the community as well as try to stimulate demand among patrons. The goal is to boost the perceived value of the institution and expand how the orchestra interacts with the city. Although Birman is vague about the VISION project at this point, his general philosophy seems to be one of aggressively introducing orchestral music into people’s lives, especially the city’s youth. If they become familiar with the music, he reasons, they will be more comfortable supporting it: “People don’t know what they like, they like what they know.”

VISION certainly sounds encouraging, but it isn’t going to solve the Louisville Orchestra’s current financial crisis. And while management anticipates additional cuts will be necessary, the musicians disagree.

Given the sacrifices they’ve already made, the musicians feel they’ve done their part to keep costs down, says Kim Tichenor, a violinist in the orchestra and chairwoman of the Louisville Orchestra Musicians Association. For starters, they lost two weeks of pay during the bankruptcy proceedings. In addition, she says management asked for pay concessions of $270,000, of which the union agreed to $100,000, leaving positions open, reducing the cost of auditions and benefits. They also were asked to work one week less, to which they responded by offering to work without compensation in order to fundraise. Although the musicians proposed a massive grassroots fundraising campaign, it was rejected; a similar in 1992 campaign raised $250,000.

Beyond these points, Tichenor notes a philosophical difference between management and musicians. One school of thought is to simply keep cutting. The problem with this, she says, is that the cuts may never end. The other problem is that eventually, you cut into muscle instead of fat, killing what makes the orchestra marketable: its greatness as a unit. It’s not that the orchestra would go from 71 full-time staffers to 55 and perform as a 55-piece unit. Instead, management wants to fill the gaps with 16 temps who would receive no benefits. Who are these Louisville-based, world-class musicians awaiting the call? Tichenor argues they don’t exist, meaning the inevitable result would be compromised quality. “When an orchestra sounds great, marketing is easier,” she says. “When you start to diminish quality, you won’t sell as many tickets.”

What she wishes to see is an embrace of the method used by Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts in Washington, D.C. Considered one of the top turnaround artists in the nonprofit world, Kaiser believes that to make arts viable, you must spend a good deal of money on marketing and ensure you have the best possible product, thereby maintaining the good will of the community. There were efforts to get Kaiser to come to town in an advisory capacity, but that never came to fruition, and Tichenor is unsure why.

“We never decided not to have him here,” Birman says. “Once we are on our way to fiscal sustainability, we welcome the opportunity for him to come to Louisville.”

What’s more, Tichenor says Birman has ignored what ideas the musicians have had. One idea, she says, was to record a CD of “Flourishes and Gallop” by composer Morton Gould. The musicians thought the equine-themed recording could be sold during the Kentucky Derby Festival as the event’s official soundtrack. They offered to perform at the Kentucky Oaks and on Derby Day to promote the CD.

The musicians also proposed playing more concerts for the weeks they are already being paid, but to no avail. “Look at our schedule,” Tichenor says, “there are holes all over the place.”

The Louisville Orchestra’s management rejected the ideas.

Specifically, Birman says the musicians already work near the capacity allowed by their contracts.

Overall, Tichenor says, the orchestra does not feel validated by management. “There is a feeling of frustration from the musician … good ideas go into the void never to be heard from again.”

As a result, the musicians formed Keep Louisville Symphonic, a nonprofit dedicated to promoting orchestral music. On Jan. 29, the group held a fundraiser lead by former Louisville Orchestra conductor Uriel Segal. An estimated 1,000 people attended the free concert, raising approximately $50,000 in donations.

As Louisville’s musicians are holding fundraisers to help keep the orchestra afloat, their counterparts a few hours south in Nashville are a reminder of what could be. The Nashville Symphony pays its 81 musicians a base salary of $51,400, while Louisville pays its 71 musicians an average of $34,200. The Nashville Symphony has a budget of $23 million, almost four times that of the Louisville Orchestra. It’s a similar story just a couple hours north, where Cincinnati’s orchestra has a budget of $44 million, and Indianapolis has a $26 million budget.

According to Tichenor, Nashville has embraced the model that musicians here want: investing in fundraising, launching successful capital campaigns, and managing through crises without any hits to the musician count.

In response, Birman argues Nashville is so successful today because it went through Chapter 11 in 1988 and emerged with a more sensible operating model.

Alan Valentine, CEO of the Nashville Symphony, agrees that the organization’s bankruptcy was crucial toward righting its path. The organization emerged smaller and with a new level of fiscal discipline. It became far more hard-nosed about finances, making budgets that predicted revenue in a realistic way. One example: It no longer uses tickets to fund current operations, instead putting the money in escrow.

Nashville also has a few things going for it that Louisville does not. For example, popular contemporary Christian singer Amy Grant — who lives in Nashville — held a series of concerts there to help retire the orchestra’s debt. Also in 2006, the Nashville Symphony moved into its new home, the Schermerhorn Symphony Center, a world-renowned facility that cost $123.5 million, money raised through a massive capital campaign. As a result of the new hall, the orchestra is more engaged with the community, Valentine tells LEO, helping it mitigate the recession.

The bankruptcy, he contends, had at least one upside: It reminded Nashvillians of what was at stake. Before relocating to Nashville, company executives from around the nation would look to the health of the city’s arts scene. The feeling was that a city unable support its orchestra was not quite first-rate. (On the flipside, Nissan North America cited the revitalized orchestra in its decision to move to Nashville.)

“Bankruptcy is a tool for dealing with the situation, not the end of the world,” Valentine says. “It could be the beginning.”

When it comes to the arts in Louisville, not all organizations are struggling. For example, the Kentucky Opera is doing well, in large part due to a pre-emptive program it enacted in 2007 to gets its finances in order. Opera CEO David Roth says the biggest part of the plan was to move from Whitney Hall at the Kentucky Center to the more intimate Brown Theater. The relocation reduced overhead by $200,000 annually. The opera also merged its finance and marketing departments, saving more than $50,000 a year, in addition to partnering with the Louisville Orchestra, as mentioned above, sharing computer and phone systems, as well as a receptionist.

The opera — a smaller operation than the orchestra, with no full-time performers — broke even in 2010.

Though times are tough, there is no single narrative for how major arts organizations are faring. Many orchestras, like Detroit, Philadelphia and Pittsburgh, have struggled, while the Honolulu Orchestra went under in late 2010.

On the contrary, some orchestras are thriving. In November, the Dallas Symphony Orchestra announced it raised $20.7 million of a proposed $50 million capital campaign. In January, the St. Louis Symphony saw ticket sales jump 20 percent to $5.2 million by mid-season.

How to explain the variance? One likely reason is the fact that some cities were hit harder by the recession than others. And when times are tough, spending on the arts drops.

Indeed, orchestras can never be profitable based on ticket sales alone. In his 2008 research paper “Symphony Musicians and Symphony Orchestras,” Robert Flanagan, of Stanford University’s School of Business, notes orchestras have seen revenues fall short of expenses since the start of the 20th century, and the gap has steadily grown. In the late 1930s, the average orchestra earned 60 percent of their total budget from performance revenues. By 2000, that number fell to 45 percent.

Another problem is a decline in young patrons. A National Endowment for the Arts survey found that the median age of orchestra patrons rose from 40 years old in 1982 to 49 in 2008, and attendance among college-educated adults has declined by 30 percent. Meanwhile, government support has steadily dwindled since the late 1980s. In 2010, the Louisville Orchestra received $1.55 million from government grants and the Greater Louisville Fund for the Arts, down 11 percent from 2008.

Despite this, Louisville Orchestra musicians do not believe the situation is hopeless. They contend there is almost $9 million in obtainable funds held by the aforementioned Louisville Orchestra Foundation, a charitable group created in 2004 for the purpose of supporting orchestral music in Louisville. Orchestra management has argued the group is a separate entity, and should not be used as a piggybank.

While the foundation and the orchestra are legally distinct, there is no doubt they are closely linked. For one, they share a phone number and address. The bookkeeper for the foundation, as listed on their taxes, is Tonya McSorley, the orchestra’s chief financial officer. Also, Joe Pusateri, a board member of the Orchestra Foundation, is a past president and current member of the Louisville Orchestra Board of Directors.

Some observers have questioned why the foundation hasn’t done more to rescue the orchestra in its time of need. For example, the nonprofit provided only $43,400 to the struggling orchestra in 2009. On that, Birman declines comment, saying the orchestra does not control the foundation.

Attempts to speak with a representative of the Orchestra Foundation were unsuccessful.

There are, as a result, some lingering questions about how the foundation has managed its funds. According to an independent audit, in 2008, the foundation’s total investments were valued at $11.5 million, but that number has since shriveled to $8.9 million. As of May 2010, its most recent fiscal year, the foundation saw its mutual fund portfolio valued at $4.9 million. It also is invested in something called the Hatteras Funds, which basically mass markets access to hedge funds, venture capital and private equity. The one Hatteras Fund with a public ticker has sky-high annual operating fees of 4 percent and has grossly underperformed. Normally this might not merit mention, but as the orchestra battles insolvency, it becomes more germane.

For now, the parties are settled into a weary stasis, with the next big action to come when the musicians’ contracts expire at the end of May. At that point, the prior arguments will likely be taken up once more and either bankruptcy will be granted or, once again, the issue will be punted down the field.

Should the orchestra successfully declare Chapter 11, maybe it will remind Louisvillians what’s at stake — an internationally acclaimed orchestra. “I’m wondering if Louisville recognizes this as much as the rest of the world does,” says Bruce Ridge, chairman of the International Conference of Symphony and Opera Musicians. During his world travels, Ridge says he has often encountered musicians who own recordings by the Louisville Orchestra. This is particularly true for recordings of new American music, which is how the Louisville Orchestra first built its reputation.

But Ridge believes the management’s decision to spend so much time telling the public the orchestra cannot work has become a self-fulfilling prophesy. “The bottom line is, people will donate to organizations that inspire them,” he says, “and will not donate or invest in organizations that question their own sustainability.”

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