When It Rains...

The fallout from the global financial crisis is only just beginning to make itself felt at American orchestras and opera companies, and everyone in the business is battening down the hatches, slashing costs wherever they can, and generally preparing for a frightening few years.

Even on the off chance that the current recession turns out not to be as severe as everyone seems convinced it will be, nonprofits will be hurting for some time because of what's known as the trailing average. Basically, in order that businesses like ours, which do not stockpile profits and therefore have little margin for error on the balance sheet, not be caught with our pants down when an economic downturn hits, we base our fiscal management not on current economic data, but on the average data of the past three fiscal years - the trailing average. This has the advantage of giving us time to adjust to severe fluctuations in the market, since we'll be hit by them gradually over three years, but has the disadvantage that we'll still be climbing out of the hole three years after the market swings back to positive territory.

That trailing average is one reason why, despite the complete collapse of the credit markets and the plummeting stock averages, you've seen a lot of orchestras (Minnesota included) trumpeting balanced budgets and even surpluses for the most recent fiscal year. It's not that we're not affected by the dismal state of things - it's that the collapse hasn't yet shown up in our official balance sheet.

But the New Year is bringing plenty of bad news for the economics of performing arts groups. The Metropolitan Opera, by far America's largest classical music organization, has been flying high artistically for the last decade or so, but now, their general director has openly admitted that the company's endowment has been so battered by the markets that it has reached a level where the Met cannot draw a single dime out of it until things improve. Further, ticket sales have stagnated and the company is at risk for a whopping $40m deficit for the current year.

Over in Philadelphia, a leadership vacuum at the Philadelphia Orchestra (which currently has no music director or music director designate, and just bumped its CEO out the door last week) has the ensemble's board supremely nervous, and there's talk of asking the musicians to reopen their contract. Philly has a long history of bad blood between the musicians, management, and board leadership, so this situation could be one of the first to get truly ugly.

There's more: the Baltimore Symphony laid off five staffers last week, New York City Opera is in a huge fiscal and artistic mess, Washington National Opera has canceled its planned 2009-10 production of Wagner's massive Ring cycle, and smaller groups from coast to coast are in even more severe trouble. It's almost a certainty that a handful of small orchestras will close up shop completely before it's all over, which will very likely lead to yet another round of poorly written, poorly conceived articles in the national arts press claiming that orchestras just aren't economically viable in today's world. (The reality is that well-managed orchestras are perfectly viable. But a lot of orchestras, especially smaller ones, are managed by people who don't even have a basic knowledge of the economics of non-profits.)

At our shop, the weekly Management Team notes that are e-mailed to us show our leadership group trying every money-saving trick they can think of to shave costs and prepare responsibly for a very scary couple of years ahead. So far, we haven't had to lay anyone off, and no one's said anything (yet) about reopening our contract (we're in the second year of a five-season deal which was designed as a "catch up" contract to get us back to parity with other major American orchestras after half a decade of wage freezes and token 1% raises,) but the possibility of both of those scenarios is certainly in the back of everyone's mind.

If there's a silver lining to all this (and I'm not saying there is,) it could be that, in times of economic turmoil, anecdotal evidence suggests that some donors (particularly those on the high end of the income spectrum) actually tend to up their donations, perceiving that the causes and organizations they support have a greater need than usual. Also, past recessions have sometimes caused Americans to reevaluate their priorities, and spend more time and money helping others, even as they cut back on personal spending. This is the kind of altruistic behavior that drives Wall Street batty (giving $100 bucks to Habitat for Humanity does absolutely nothing for the Consumer Price Index,) but gives those of us in the non-profit world a prayer of surviving the fiscal winter.

This isn't to say that we're likely see an uptick in overall donations this year, by the way. While some generous souls who can afford to will give more, the vast bulk of mid-level donors, those who give us between $1000 and $10,000 in an average year, say, will likely be in no position to do so this year, and the dropoff could be severe. And of course, you can't blame people for not giving away money they don't have.

So what should you watch for over the coming year or two to determine whether your favorite charity or arts group is in serious danger, or weathering the storm? There's no single canary in the coal mine, but I always keep an eye on three basic contextual signals:

1) How are other similarly-sized arts groups in the region performing? (In other words, if you're worried about the Minnesota Orchestra, keep an eye on the Guthrie and the Walker Art Center as well.)

2) How transparent and open is the organization being about its economic situation? (A struggling but well-managed arts group will always go out of its way to be as transparent as possible, to show that it has nothing to hide, and wants its supporters to feel involved in helping it keep its head above water. Organizations truly on the brink of collapse tend to turn inward and start claiming that everything is fine, just before they go over the cliff.)

3) When cuts are made, are they made to areas that can be restored later without hurting the organization, or are they cuts designed to permanently scale back the group's operations? (For instance, an orchestra that cancels an international tour for lack of funding is making a one-time cut that, while painful, will not affect the group's ability to tour in the future when funds become available. An orchestra that locks out its musicians for weeks and forces a 25% pay cut across the board has just dropped itself out of its national peer group, and very few orchestras ever make it back to major league status after such a cut.)

The good news is that Minnesota continues to be just about the best state in America for arts and cultural support, and believe me, every one of us in the business locally is well aware of how lucky we are at a time like this to be living and working in MSP, rather than in, say, Columbus. Undoubtedly, we're in for some rocky months and years ahead, but it's in times like this that it's most important for us to remember to say thank you to those who keep us going year after year, and to perform with the kind of passion that makes you want to keep supporting us.