Aug. 21 (Bloomberg) -- Local chambers of commerce like to brag about their professional sports teams and arts groups as a way of attracting business and residents to their cities.
The ability to use classical music groups in such campaigns may be increasingly at risk, say experts on professional music organizations, who warn that growing deficits among U.S. orchestras may be placing that sense of civic pride in jeopardy. It’s a crisis some are choosing to resolve through bankruptcy.
The financial crisis facing such groups, and how they may come out on the other side, was put in the spotlight by the bankruptcy this past year of the Philadelphia Orchestra. The group was the biggest among at least five U.S. symphonies to seek court protection in the wake of the 2008 economic collapse. Others include music organizations in Louisville, Kentucky; Syracuse, New York; Albuquerque, New Mexico; and Honolulu.
“The orchestra has functioned as a symbol of civic pride and cosmopolitanism,” Steve Metcalf, director of instrumental studies at the Hartt School of music at the University of Hartford in Connecticut, said in an interview. “There’s still a feeling that a major league orchestra is still a very important thing for a city.”
Though subject to the same harsh realities of bankruptcy as corporations, the recent reorganization in Philadelphia -- and the decreased debt and expenses the group emerged with -- may serve as a model for other symphonies struggling with fewer donors and lower ticket sales.
With its turnaround plan approved, the Philadelphia Orchestra Association exited court protection July 30 after 15 months, having resolved $100 million in claims with a $5.5 million settlement, shrinking its payroll and winning a release from its pension obligations.
Bankruptcy has been “a four-letter word in the performing arts world,” said Michael Mauskapf, a co-founder of the boutique consultant Symphony Bros. LLC. Given Philadelphia’s success in navigating reorganization, he said, it may be a strategy other suffering groups may want to consider.
Another series of orchestra collapses took place a decade ago. The symphony in San Jose, California, sought court protection in 2002, and the one in Tampa Bay, Florida, filed for bankruptcy in 2003.
Even before the recession, symphonic music faced declining ticket sales, said Robert Flanagan, an economics professor at Stanford University. Sales may have fallen further since then.
A 1 percent increase in local unemployment is accompanied, on average, by a 0.7 point fall in the share of performance costs covered by ticket sales, Flanagan wrote in “The Perilous Life of Symphony Orchestras,” published this year.
Performance income fell from 48 percent of U.S. orchestras’ revenue in 1987 to 37 percent in 2005, Flanagan wrote. By 2005, the average orchestra got 45 percent of its income from donations, 13 percent from investments and 5 percent from governments.
Jesse Rosen, president and chief executive of the 850-member League of American Orchestras, said one of the drivers of recent financial difficulty for many groups is a decline in state and federal funding.
“The state and local funding in some cases has been really severe,” Rosen said in an interview. “That has been because of tremendous pressure put on the states as a result of their getting less money from the federal government and eroding tax bases in cities.”
Taken with the recent recession, its negative effect on individual donors, and what Rosen said are changing priorities among philanthropists, orchestras are facing very tough times.
“By the standards applied to profit-seeking organizations, symphony orchestras have been a declining industry in the United States over the past two decades,” Flanagan wrote in a 2008 research paper.
Struggling symphony orchestras that should consider using federal bankruptcy courts to stabilize their finances include those with runaway expenses similar to Philadelphia’s, said Lawrence G. McMichael, a lawyer for the orchestra in its bankruptcy case.
If a symphony faces contract and pension obligations it can’t afford, owes debt it can’t pay, or needs financing it can’t get, bankruptcy might be a good option, said McMichael, of the Philadelphia law firm Dilworth Paxson LLP.
Reorganization may not save a symphony. Even when it succeeds, an orchestra may end up with lower-paid musicians or fewer of them, or both.
“I think bankruptcy should be used as an absolute last resort,” said Jay Blumenthal of the American Federation of Musicians in New York. “We’re talking about the livelihood of highly skilled professionals that essentially ends up in jeopardy.”
Just as with automakers or airlines, bankruptcy allows nonprofit organizations such as orchestras to cancel debt and labor contracts, and to borrow to meet expenses. For insolvent symphonies, the outcomes vary.
The Florida Orchestra, based in St. Petersburg, is still performing. So is the Albuquerque Philharmonic Orchestra. San Jose’s orchestra stopped playing and never resumed.
Musicians in Tulsa reorganized into the Tulsa Symphony Orchestra in 2005 without filing for bankruptcy. Those in Honolulu and Syracuse also formed new ensembles after their orchestras closed.
The Louisville Orchestra, which entered bankruptcy in 2010 and emerged in April 2011, needed a two-step turnaround. It missed a full season, using the time to negotiate its way out of an impasse with musicians after emerging from bankruptcy, said Robert Birman, its chief executive.
When the organization went to court, its debt included more than $43,000 in past pension obligations. It had exhausted a $650,000 line of credit and decided it couldn’t continue borrowing, Birman said.
As the symphony started negotiating a new musicians’ contract, it decided not to ask players to take pay cuts, he said.
“If you reduce the wages of your workers, you then suddenly have two things -- a dissatisfied worker base and you become uncompetitive in terms of having to replace them if they retire and move away,” Birman said.
Musicians at top orchestras spend as much $200,000 for a conservatory education and $100,000 on their instruments, the union’s Blumenthal said. They also commit themselves to a rigorous practice schedule, he said.
It’s “untenable” to expect them to make those investments then “have severe concessions placed on them with regard to their ability to make a salary,” he said.
The Louisville orchestra kept base pay at $925 a week and cut the season from 35 weeks to 30 to cut costs.
Even with the uncertainty of last year, the orchestra sold $360,000 in advance season tickets, Birman said. That was down from the average of $500,000, and it had to refund the money when it canceled last season. Even so, Birman said, the sales encouraged him about the season that begins in October.
The Delaware Symphony Orchestra in Wilmington reorganized without filing for bankruptcy. It announced in June that it was scaling back its 2012-2013 season. Betty Duncan, vice chairwoman of its board, said the orchestra planned an overly ambitious performance schedule, including more guest musicians and productions that were costlier than it could afford.
“It was very thoughtful in terms of artistic capability and offerings -- a very exciting season -- but we failed to assimilate the numbers behind that offering,” Duncan said.
The Delaware Symphony didn’t consider bankruptcy because it doesn’t have assets to reorganize, so its options were to cut back the season or close.
Metcalf, director of instrumental studies at the Hartt School, said many orchestral groups remain mostly profitable, and even flourishing.
“Some orchestras have obviously gone out of business, and some have had these very serious fiscal and labor issues,” Metcalf said. “It’s also true that it’s kind of a city-by-city proposition.”
The Chicago Symphony Orchestra had a record fundraising year in 2011, with $24.2 million in donations, or 15 percent more than the previous year, according to a statement about its annual meeting.
The orchestra’s $927,000 deficit was 1.4 percent of the $67 million operating budget. It had surpluses of less than $50,000 in the two previous years.
Mark Volpe, managing director of the Boston Symphony Orchestra, said that attendance, though having dropped slightly, is on the rebound.
“We have been fortunate to have strong support from our patrons for the past few years in response to the challenging economic environment,” Volpe said in an e-mail.
In Philadelphia, the symphony’s leaders were afraid they would lose attendance and donations if they filed for bankruptcy, said McMichael, the lawyer. Instead, income from both sources grew, he said.
The orchestra association, with a $46 million fiscal 2011 budget, saw revenue fall by $1.8 million from 2008 to 2010, with ticket sales declining to 153,000 from 183,000.
The association repeatedly spent more of its endowment than the industry standard of 5.5 percent or less, Richard B. Worley, its board chairman, said in a court filing.
The association went to court in April 2011, telling U.S. Bankruptcy Judge Eric L. Frank in a filing that it needed relief from its pension obligations, musicians’ contract and concert hall rent, as well as from a $1 million obligation to support the Philly Pops run by the pianist and conductor Peter Nero.
Philadelphia didn’t reduce the size of its orchestra. Its musicians agreed to a renegotiated labor contract that reduced their base salary.
The musicians’ base pay, which would have been $2,520 a week during the last six months of the contract, was cut to $2,400 a week through October and then to $2,000 a week for the season that ended this spring. They will get $2,100 a week starting in October.
Pensions were taken over by the U.S. Pension Benefit Guaranty Corp., the agency that steps in when a plan fails.
Ticket sales for the past 28-week season rose 5 percent compared with the year before and the number of concerts with audiences of 90 percent of capacity increased by two-thirds, said Janice Hay, the orchestra’s vice president of marketing.
Allison Vulgamore, the association’s president and CEO, said bankruptcy was the right choice.
“I don’t wish this experience on another orchestra, but I know in my heart that we traveled the path we did to ensure that the Philadelphia Orchestra didn’t simply play for a few more years, but rather that it played for generations to come,” Vulgamore said in an e-mailed statement.
Not everyone involved with the Philadelphia group’s reorganization thought bankruptcy was the right thing to do.
Ray Hair, president of the musicians’ union international, called the bankruptcy a “clumsy, flatfooted attempt by the orchestra management to shed itself of a great labor agreement.”
“The company got a lot of what it wanted by pushing the salaries and conditions for the musicians down a notch,” Hair said. “The company spent $8 million on that process, and that’s certainly money that could’ve been used to improve the livelihood of its musicians.”
Metcalf of the Hartt School said that one result of the financial crisis among orchestras is that the groups themselves are changing to match the times. He said smaller orchestras are being formed and are managed by musicians not conductors.
“A symphony orchestra that has been 110 people in formal wear may be giving way in many cases to a different model,” he said.
Rosen, head of the League of American Orchestras, agreed that they need to change.
“It’s moving quickly from a tradition and set of operating practices that were very successful for the time in which they were developed, which was really the second half of the last century, toward operating models and missions that are attuned to today’s world,” Rosen said.
Orchestras are joining local community organizations to get more people interested in classical music, he said, citing a venture of the Atlanta Symphony and Emory University, which is organizing public forums and projects for the university’s students.
More than 60 percent of the 30,000 performances given by U.S. orchestras every year are educational or community-focused, Rosen said.
People may value orchestras without loving classical music, according to Metcalf.
“In many big cities where there’s a major league sports franchise, or more than one franchise, you often find people who may not be NBA basketball fans or certainly may not be NFL football fans, but they’re very conscious of what the team brings to their city and community,” he said. “I think an orchestra is the same way.”
The case is In re Philadelphia Orchestra Association, 11-13098, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).
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