The Perilous Life of Symphony Orchestras

Artistic Triumphs and Economic Challenges

By Robert J. Flanagan

Yale UNIVERSITY PRESS

Copyright © 2012 Robert J. Flanagan
All rights reserved.
ISBN: 978-0-300-17193-8

Contents

Acknowledgments……………………………………………………vii1. Surpluses, Deficits, and Symphony Orchestras……………………….12. Why Are Surpluses So Difficult to Maintain?………………………..63. Cost Disease or Business Cycles?………………………………….194. Snapshots of Symphony Orchestra Finances…………………………..315. The Search for Symphony Audiences…………………………………406. Artistic and Nonartistic Costs……………………………………637. Government Support of Orchestras………………………………….918. Private Support of Orchestras…………………………………….1129. Symphony Orchestra Endowments and Governance……………………….12410. How Do Other Countries Support Their Orchestras?…………………..14411. The Economic Future of Symphony Orchestras………………………..171Appendixes………………………………………………………..187Notes…………………………………………………………….209References………………………………………………………..213Index…………………………………………………………….219

Excerpt

CHAPTER 1

Surpluses, Deficits,and Symphony Orchestras

On February 26, 2008, the New York Philharmonic Orchestra, the oldestsymphony orchestra in the United States, played a remarkable concertin Pyongyang, the capital city of North Korea, as part of an effort to usecultural exchange to thaw diplomatic relations between the two countries.The program included the national anthems of each country, the preludeto act 3 of Richard Wagner’s Lohengrin, Antonín Dvorák’s “New World”Symphony, and George Gershwin’s An American in Paris. The encores includedcompositions by Georges Bizet and Leonard Bernstein, along witha popular Korean folk song. Whatever the ultimate diplomatic effects, theconcert itself was an artistic and popular triumph. The Economist (2008) reported,”The orchestra received a rapturous standing ovation. Even NorthKorea’s most senior attendee, Vice-President Yang Hyong Sop, readily gotto his feet.”

About six weeks earlier, the board of directors of the Columbus, Ohio,symphony orchestra, which had presented a critically acclaimed performancein Carnegie Hall ten years earlier, announced that their orchestrawas near bankruptcy. Faced with several years of deficits, the board proposedto save about $2.5 million in the following year’s budget by reducingthe number of full-time orchestra musicians from 53 to 31 and reducingthe concert season from 46 to 34 weeks. Part-time musicians would behired when necessary to fill the orchestra’s ranks. The musicians’ unionsubsequently rejected that proposal, citing the impact on the income ofthe symphony’s musicians. In late September, following the cancellationof summer concerts and the 2007–8 concert season, the symphony’s musiciansratified a new agreement that involved $1.3 million in reduced wagesas well as forgone health and pension benefits. A later agreement negotiatedin 2011 provided musicians with base pay equal to 64 percent of their payin 2008 (Sheban 2011).

Both events were “typical” in the sense that, over longer periods,there are a significant number of U.S. orchestras that run surpluses andan even larger number that run deficits. Even the New York Philharmonic,one of the wealthiest symphony orchestras in the United States, faces significanteconomic challenges, with ever-growing expenses and declines insome types of performance revenue (Lubow 2004). Averaged over the 1987through 2000 concert seasons, the financial balance for 63 large U.S. symphonieswas negative (deficit), but the experience of individual orchestraswas widely dispersed. Forty-six orchestras ran deficits on average, while17 orchestras ran surpluses on average. But irrespective of their averageposition, all orchestras experienced considerable annual variation in theirfinancial balance. In each year some orchestras ran significant surpluses,while others ran significant deficits, but none of the 63 orchestras had surpluses(or deficits) throughout the entire period. The next chapter sets outthe foundation of the ongoing economic insecurity faced by symphonyorchestras.

In year 2000 dollars, the overall financial balance for the median orchestrachanged from a deficit of almost $49,000 in 1987 to approximate balancein 2000 following a strong growth of private contributions during therobust economy of the late 1990s. Most orchestras achieved their strongestfinancial position during 1997–99, when highly favorable general economicconditions prevailed. Finances again deteriorated during the recession thatgreeted the 21st century and the Great Recession that began in late 2007.This pattern signals the importance of general economic conditions onthe financial health of orchestras, a phenomenon that receives more attentionin chapter 3. But many other factors influence an orchestra’s financialhealth, for whether general economic conditions are good or bad, financialoutcomes vary enormously among individual orchestras.

The demise of several orchestras over the past 20 years further signalsthe financial pressures on the industry. Bankruptcies have includedthe Florida Philharmonic Orchestra (2003) and orchestras in Birmingham,Alabama (1993), Oakland (1994), Sacramento, California (1996), San Diego(1996), San Jose, California (2002), Tulsa (2002, following a reorganizationin 1994), Honolulu (2009), Louisville, Kentucky (2010, following a nearmiss in 2003), Syracuse, New York (2011), and Albuquerque, New Mexico(2011). Some of these orchestras eventually reorganized and reopened—usuallywith a different name and distinctly weaker finances. Two other orchestras,Denver and New Orleans, entered bankruptcy and later reformedas labor cooperatives—the Colorado and Louisiana symphony orchestras,respectively. Nor have the difficulties been limited to regional orchestras. InOctober 2010 the Detroit Symphony Orchestra’s musicians struck followingdisagreements with management about how to address a serious financialdeficit. With the strike unresolved in February 2011, the managementof the orchestra canceled what was left of the 2010–11 concert season. Afterfurther negotiations, the musicians and management reached an agreementthat permitted an abbreviated concert season to begin in mid-April 2011.Two foundation gifts failed to alleviate serious financial pressures facing thePhiladelphia Orchestra, which filed for bankruptcy in April 2011—the firstsuch action by a major U.S. orchestra.

What explains these disparate experiences? Why are many symphonyorchestras living on the edge, while others are in a comparatively securefinancial position? Answering these questions requires an understandingof the economic environment in which symphony orchestras exist and ofthe main institutions that influence that environment. Understanding theenvironment is partially a matter of appreciating why the flows of revenuesreceived and expenses incurred by symphony orchestras look so differentfrom the revenues and expenses of a typical business organization. Chapter4 explores these revenues and expenses. Happily, there is more than anaccounting exercise involved. Understanding the underlying forces clarifieswhy most orchestras must be organized as not-for-profit organizationsand why even the advantages of this form of organization do not guaranteefinancial health.

More than accounting is at stake also because the revenues and expensesof symphony orchestras reflect decisions by individuals and institutionswhose motivations must be explored to fully understand the economicenvironment of orchestras. Performance revenues rest importantly on attendancedecisions—why some people choose to attend an orchestra performancewhile others opt instead for competing uses of their leisure time.Chapter 5 explores the prospects for raising performance revenues. Muchof the salary expense incurred by orchestras reflects the outcome of collectivebargaining negotiations between symphony management and unionsrepresenting artistic and nonartistic personnel. Chapter 6 examines thegrowth and structure of pay within and between U.S. orchestras.

For reasons that will become apparent, symphony orchestras, mostother performing arts groups, colleges and universities, and many othernonprofit organizations must rely upon income that does not flow fromtheir normal operations. The flow of such nonperformance income to orchestrasdepends upon a variety of complex decisions. Government supportreflects how and why governments decide to support the arts, for example.The nature of public support of U.S. orchestras discussed in chapter 7 contrastssharply with the approach to government support taken elsewhere inthe world (chapter 10). Private nonperformance income depends on thecapacity and motivation for philanthropy by individuals, businesses, andfoundations (chapter 8). A board of trustees is responsible for the generalgovernance of a symphony orchestra, including its financial performance.The board’s investment and management of an orchestra’s endowment determineboth the annual flow of investment income and the availability ofendowment resources to support future activities (chapter 9). This booktries to integrate the economic facts with the motivations and behaviorsunderlying the revenues and expenses of symphony orchestras.

Viewed superficially, foreign orchestras may seem to escape the financialchallenges faced by their U.S. counterparts. Elsewhere in the world, symphonyorchestra bankruptcies are unheard of, for example. Yet no orchestrain the world earns enough to cover its operating expenses; no orchestra isself-supporting. Instead, orchestras around the world face common economicchallenges with different sources of nonperformance income. Theabsence of bankruptcies abroad reflects the prominent role of governmentsin providing subsidies to orchestras and other performing arts. Chapter 10assesses the scope of government support abroad and discusses how a systemof government subsidies influences an orchestra’s performance revenuesand expenses.

Care must be taken in selecting organizations for a representative industrystudy. A study of symphony orchestras should include organizationsthat represent the diversity of organizational experience and account formost of the sector’s activity. If one were to choose the largest symphony orchestrasat the beginning of the study period (1987 in this case), the studywould lose information on emerging orchestras that later grew into musicaland economic significance. If one were to choose the largest orchestras atthe end of the period (2005 in this case), the study would lose informationon musical organizations that have declined or even disappeared duringthe study period. Such biases from the selection of a sample are potentiallyserious, since both growing and declining orchestras can yield importantinformation on the sector’s economic challenges.

To preserve such information, the sample analyzed in this book includesevery symphony orchestra that was one of the largest 50 symphoniesin the United States (based on budget size) for at least two years during the1987–88 through the 2005–6 concert seasons. Each symphony that met thisrequirement remains in the sample throughout the 19-year period, irrespectiveof its rank in other years. Stable, ongoing organizations dominatethe sample; the majority of the orchestras reported data for 18 or 19 yearsduring the period. But the selection procedure retains some orchestraswhose economic health declined during the period (and hence would notbe in the largest 50 symphonies late in the period), along with growingorchestras that moved into the “top 50” category late in the period. Thisapproach produced a sample of 63 symphony orchestras (listed in the appendixto this chapter), representing over 70 percent of orchestra revenuesand expenditures in the United States. If there is a group that is slighted bythis procedure, it is the smallest symphony orchestras. As it happens, theseorchestras are likely to submit incomplete data at irregular intervals—factorsthat would have limited their weight in the analyses anyway. Theanalysis also relies on U.S. government data on local market characteristics,such as population and per capita income, and data on the operations andfinances of competing performing arts organizations.

CHAPTER 2

Why Are SurplusesSo Difficult to Maintain?

The permanent orchestra season has, as usual, been financially a bad oneall over the country. With the end of April … come the bills for those whopay the piper…. There is always a deficit, which public-spirited guarantorsare called upon to pay year after year. A permanent orchestra, it seemspretty well established by American experience, is not at present a payinginstitution, and is not likely immediately to become so…. [Nevertheless,]the prevailing note of the guarantors of the America Orchestras is one ofhopefulness. Things are coming on; the public is being educated; it willsupport the orchestras in larger and larger numbers till they are finally …self-supporting.

This quote from a New York Times article could have been written in theearly years of the 21st century. As it happens, it appeared a century earlierin a review of the financial results of the 1902–3 concert season (Aldrich1903). In it we can see a number of themes that remain salient today. First,no symphony orchestra earns enough from performances to cover its performanceexpenses. Second, that fact is not likely to change in the foreseeablefuture. Third, the survival of orchestras depends on the resourcesprovided by “guarantors.” And, finally, the hope persists that building audienceswill make orchestras self-supporting.

A century later, the durability of the economic challenges facing symphonyorchestras worries pessimists, while the continued survival of mostmajor symphonies may encourage complacency among optimists, whoconclude that solutions to chronic operating deficits will always emerge.In fact, the optimistic prognosis that concludes the 1903 New York Timesarticle proved wrong. The growth of orchestra’s revenues from concertperformances, recordings, and broadcasting continues to lag behind thegrowth of performance expenses. And orchestras have had variable successin offsetting their operating deficits with the resources of guarantors.

Understanding the economic choices facing symphony orchestras requiresan understanding of why they cannot evolve as self-supporting organizations.This chapter first reviews the history of how U.S. symphonyorchestras rapidly moved from self-supporting status to permanent operatingdeficits. Then follows a discussion of why self-supporting status is anelusive goal.

The Evolution of Symphony Organizations

Many of the earliest symphony orchestras in the United States were organizedas musicians’ cooperatives. After acceptance into an orchestra, playerspaid an initiation fee and an annual charge, chose their conductor, hiredrehearsal and performance venues, and accepted a share of the net proceedsas their compensation. As residual claimants, however, they bore most ofthe economic risk of early musical ventures and had to divide their timebetween artistic and management activities. Some musicians mitigated therisk by giving preference to outside paid performances over symphonyrehearsals. The cooperative structure of some early symphonies also gavemusicians a property right in their positions, which proved a barrier tochanging personnel to upgrade orchestra quality (Caves 2000). Orchestrasclearly required a different organizational form if they were to improve performancequality. By the late 19th century, most symphony orchestras nolonger earned a surplus that could be divided among the musician- owners.As the New York Times quote reminds us, operating deficits became a wayof life.

Several major orchestras eventually acquired individual “angels” orsmall groups of committed donors who pledged funds to cover the ubiquitousoperating deficits. The New York Philharmonic, founded in 1842, initiallylacked such support and was unable to operate as a full-time residentorchestra. The Boston Symphony Orchestra, founded in 1881, enjoyed thesupport of a single wealthy individual. The Chicago Symphony Orchestra,founded 10 years later, relied on the members of an orchestral associationwho pledged funds for the orchestra’s operation. With this support, majorsymphonies were able to expand in size, to lengthen seasons, and toguarantee musicians a weekly salary for the duration of the season. Thosewho pledged the funds also took over or arranged for the management ofsymphony activities, and musicians were able to focus on their art. Whiledonors expected no monetary return on their contributions, many weresurprised by the persistent growth of operating deficits (Hart 1973).

Shifting from labor cooperatives to professional management no doubtimproved artistic quality, but contrary to the hope expressed at the end ofthe New York Times excerpt, revenues earned from performances continuedto fall short of performance expenses, eventually exceeding the resourcesof even wealthy individuals. Individual angels gave way to small groupsof committed wealthy guarantors who covered performance deficits. Asdeficits continued to grow, however, the function of symphony boards expandedfrom giving money to also raising money so that orchestras couldsurvive. Yet by 1940, a wide-ranging study of the industry could state that”in spite of their vitality, growth in numbers, and the volume of their attendance,all symphony orchestras are facing serious financial problems andtheir future rests on an unstable basis. Receipts from tickets have neverbeen enough to balance the costs…. All, therefore, have had to resort tovarious kinds of deficit financing…. Endowments are becoming more difficult to build up and the income therefrom has been found uncertain whenmost needed in depressions. Annual maintenance fund drives are findingfewer large donors and are reaching out for more contributors of smallsums. Subsidies have been little tried in this country and involve manyproblems” (Grant and Hettinger 1940). This same study reports that bythe late 1930s, the three most successful major symphony orchestras earned”only an average of 85 percent of their total budgets, while … the wholegroup averages abut 60 per cent” (Grant and Hettinger 1940, p. 21). By theearly 21st century, these operating results would be viewed with great envyby most orchestras.

Twenty-six years later, a landmark study of the performing arts openedwith these words, which parallel the opening paragraphs of this book: “Inthe performing arts, crisis is apparently a way of life. One reads constantlyof disappointing seasons, of disastrous rises in cost, of emergency funddrives and desperate pleas to foundations for assistance. While some performingorganizations have improved their financial position, there alwaysseem to be others in difficulties” (Baumol and Bowen 1966).
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