Flanagan speaks!

Soundcheck, a daily program at WQXR,  WNYC Radio, did a segment on the Flanagan report on March 26. Flanagan was interviewed at length, while Deborah Borda, President & CEO of the Los Angeles Philharmonic, took the opportunity to rebut many of the reports’s conclusions. The entire segment can be downloaded, as well as streamed from the above link. My transcript of the segment (complete save for re-introductions of the participants at various  points in the segment) is below the jump.

Schaefer:   

This is Soundcheck; I’m John Schaefer:. … To begin, it’s not just regular New Yorkers who are worried about their checkbooks in 2008. As the economy heads south, a brand-new report commissioned by the Mellon Foundation offers sobering news for America’s symphony orchestras. Among the report’s findings: orchestras spend more than they take in, they pay their musicians and staff more than they can afford, and they don’t cut costs when the going gets tough.

In a moment, we’ll get a reaction from one prominent orchestral boss, but first, here to explain what it all means is the report’s lead author, Stanford University economics professor Robert J. Flanagan. Bob, welcome to Soundcheck. You write that, even if orchestras sold out every concert, the vast majority of orchestras would not be able to cover their performance expenses. That sounds like a fairly fundamental problem. What has gone wrong?

Flanagan:   

Well, this has been a characteristic of orchestras, of universities, and of other not-for-profit organizations for at least a century. The expenses that they all incur to provide – in the case of orchestras, the concerts we all enjoy; in the case of universities, an education – exceed the revenues they collect either from the patrons of symphony orchestras, or in the case of universities, the tuition amounts and the research amounts. So this is not a new development. The key fact, I think, is that the proportion of performance expenses that is covered by performance revenues continues to decline over time, even after you remove the effects of cyclical downturns, such as we’re now experiencing.

Schaefer:   

You write that musicians’ salaries, for example, have increased more rapidly than the pay of most other workers, so that the disparity between what they’re taking in and what they’re putting out is growing larger. Is that basically what you’re saying?

Flanagan:   

The discussion in the report pertains to total expenses, I should say. And incidentally, a small correction from your lead-in: the report does not say that symphony orchestras are paying musicians more than they can afford; it simply points out the fact that musicians’ salaries have been rising quite rapidly relative to other groups in society, and that this is a fact that orchestras should consider along with all their other expenses.

Schaefer:   

If they’re facing red ink and deficits that won’t go away even if they sell out every concert, what kinds of answers are there? It sounds like marketing isn’t going to be the answer, if even selling out an entire season doesn’t help.

Flanagan:   

What the report shows is that there’s no single solution that will solve the problem. The classic approach is to raise non-performance income, by which I mean the contributions from individuals, foundations, and businesses, and also public support. In the United States there is relatively little direct government support in comparison to other countries, but on the other hand the fact that we can all deduct contributions to orchestras and other philanthropic organization from our taxes means that there’s a fair amount of indirect government support for the arts. So one approach is to simply keep trying to raise the non-performance income that orchestra can acquire. Obviously the other two approaches are, one, to try to enhance revenues, even though, as you correctly point out, even those orchestras that fill their halls will not cover their performance expenses, and secondly to take a hard look at how hard expenses are pushed, and what the return a symphony organization gets for the last dollar spend in any expense category.

Schaefer:   

Obviously, Bob, we are a public radio – a not-for-profit – and we too have done a lot of the classic non-profit things, like fundraising, gala events, going for major donors, in addition to rank-and-file listener support. Are galas an effective way for orchestras to do that sort of fundraising?

Flanagan:   

The information I had available in my report doesn’t answer the question that specifically. That’s probably a great question to put to Deborah Borden (?!) when she joins the discussion. What the report does say, looking at fundraising expenses as a whole, and this is probably one of the more provocative and, in some ways puzzling, findings of the report, is that for larger orchestras on average they take in fewer contributions than they spend on fundraising. That does not hold for smaller orchestras.

Schaefer:   

Hmm. So, for a big orchestra, they invest a dollar in fundraising, they may not get that dollar back, whereas a smaller orchestra will generally make a modest profit on it.

Flanagan:   

Correct. That’s the outcome of the statistical analysis.

Schaefer:   

(welcomes Deborah Borda:) First of all, congratulations. I understand that today is the first day of rehearsals with the new music director, Gustavo Dudamel.

Borda:   

We appointed Gustavo Dudamel just about one year ago today, and this is the first time he’s back on the podium. There’s tremendous excitement in the city. The tickets for his concerts right now are being sold on eBay, because we are totally sold out for all nine. They’re being sold on eBay for $400-500.

Schaefer:   

Are you making money on those concerts?

Borda:   

This is an interesting question, of course. I have to say that I hope the industry doesn’t feel defensive about Professor Flanagan’s work. While I disagree with a number of the findings, which we’ll talk about in a moment, I think we should see this kind of work as a real help to stimulate debate, and hopefully to encourage the development of really long-range adaptive strategies which I think the field is deeply involved in right now. While I really admire his regression analysis, and the co-efficients are very impressive, we’re talking about music; we’re talking about art. We’re talking about a mission of excellence, of music, of innovation, of many different things. You know, what it reminded me of, actually, is a few years ago, the NEA came out with a study that said there was a serious decline in people reading literature. And there are some parallels. It was interesting to me that the headlines weren’t “literature in decline.” Instead, the report focused on how to get people to read more. And it also focused on the many societal challenges that we all face at all sorts of institutions, from health care to symphony orchestras to museums to the for-profit sector.

Schaefer:   

That’s a really interesting analogy. It brings up a listener comment that we received from Samla, writing from White Plains, who writes “they (orchestras) should focus on expanding their programs beyond the traditional warhorses that are trotted out year after year. (crosstalk). “There should also be more of an effort in the schools to promote their music departments, which are usually the areas which are the first to feel the effects of any budget cuts.” That idea that literature and culture and the arts are somehow less important; it’s a pervasive one, and I wonder – and let me bring Professor Flanagan. Bob, how deeply rooted is this problem. Is is something that you can’t just look at the orchestras out of the context of the bigger society?

Flanagan:   

Well, of course they’re part of the society, and of course the decisions that are made in schools regarding artistic exposure of children have a big effect on future audiences. The manager of the San Francisco Symphony has been quoted as saying that 65-70% of their patrons were people who were involved in instrumental or choral programs when they were younger; when they were in grade school or high school. So decisions made at all levels of the educational chain essentially have important effects decades later on the audiences for symphonic music.

(break for music)

Schaefer:   

Deborah, the LA Philharmonic in many ways is an exception. Apparently, the last year that we have figures for, the orchestra was running a surplus of $8 million. How does the LA Philharmonic stay in the black?

Borda:   

That’s a good question. Success in this business is about maximizing a realistic balance between earned income and contributed income. But it’s also, as I said before, about the art. I think orchestras throughout the country are telling that success story. But for us, we have a very diverse portfolio of concerts, we have a very rigorous business model, and this business model involves basic, very careful long-term planning that are set against what are the core goals of this institution, which are excellence and innovation, with a very heavy weighting towards innovation. And we working on planning in a dialog between artistic, marketing, finance, and bringing those together in an ability to take a long-term look at where we’re going.

One of the other things I was thinking about; this industry is a veteran of hearing that we’re about to drive off the cliff. The famous Baumol study in the ‘60s talked about this, and of course when we sell out Walt Disney Concert Hall, this only recaps a portion – about 45% – of the expense. And that’s true in every concert hall in the country. But the key fact is that people need to, and do and are, seeking a variety of adaptive strategies: the use of the Internet, new concert formats. In fact, it’s a very exciting time for American orchestras, because they are reacting.

I think this is a very careful study, but much of the information – just a couple of small points – comes after the real downturn after 9/11. And there are really very strong statistics which show improvement in attendance after that. Also, in terms of the fundraising figures, I wonder if Professor Flanagan included the close to $3 billion that have been raised in endowment gifts during that time, or if he looked just at the annual fund.

But these are small points…

Schaefer:   

Bob, the years of study for this report; they included the time right after the attacks of 9/11, when there was a huge downturn throughout the cultural landscape. Were you able to allow for that in the report that eventually unfolded?

Flanagan:   

Yes; the report covers the period from 1987 through 2003, using annual data that are submitted by the orchestras themselves to the League of American Orchestras. In order to deal with the cyclical variations, some of which preceded the recession which followed 9/11, basically the report includes efforts to control for the cyclical variations before testing for the effects of other variables. As far as the endowment data go, again, the report uses the data that the symphonies report themselves to the League.

Borda:   

But of course it would change considerably the money spent on – per fundraising dollar – because of course it’s the larger orchestras that are raising significant endowments, as well they should for their future. And I do think there that was a significant change, and I think we all know it throughout the country, after 2003. So I think there’s a lot of very good work in the report, but these are two key areas that I think skew it in a way that is not as positive as it might be. On the other hand, I come back to say that what the orchestra field is focusing on is; we’ve seen that cliff since the ‘60s, but somehow we’ve figured out a way to at least drive parallel to it. And I think if you look at the good-news stories of how the major orchestras are doing in this country, not just financially but in terms of the artistic innovation. In terms of the Los Angeles Philharmonic; we’re starting a program called Youth Orchestra LA; we’re starting youth orchestras throughout the city. And then the smaller orchestras, orchestra that were endangered just a few years ago; the Long Island Philharmonic, the Santa Rosa Symphony, the Rochester, the Buffalo – they’re adapting, they’re figuring out ways to plan and to really speak to their core values of music and service to the community.

Schaefer:   

I’m glad you bring up that topic of the smaller orchestras… There are several case studies in the report. Two of them, the Shreveport Symphony, in severe financial straits, and the Columbus Symphony, which Bob, in your report, you write faces a $1.4 million deficit. There was a board proposal – or rather, not in the report; these are the figures that we have – the board proposal to pare about $2.5 million from the budget for the next season, to cut the number of full-time musicians from 53 to 31, to reduce the season by 12 weeks. Is that what it takes for a small orchestra to survive in this climate?

Flanagan:   

Well, first, let’s be clear that the report says nothing about individual orchestras. It’s an industry economic fact-finding study, and there’s not a word in there about either Columbus or Shreveport, My hope, and I think the hope of some of the sponsors of the report, was that, by providing an analysis of how symphony policies, the economic capacity of areas, and the competition between performing arts, influenced the economic health of symphonies. Individual symphonies could take their own local situation, compare that or contrast that with some of the results in the report, and make decisions about how best to avoid some of the hardship situations such as the two you just described. Unfortunately, against what most of us would prefer, this is an industry where bankruptcy, or near-bankruptcy situations, occur more frequently than in other industries. The point of doing a report like this is to try to provide some baseline information that people can use in deciding what are the best strategies for their own local symphonies.

Schaefer:   

All right. Deborah?

Borda:   

A couple of points there. First of all, I think that if you compare the number of orchestras [that went bankrupt]– it gets a lot of attention when it happens, because they are important to their communities – relative to other industries, I think you will see that all but nine orchestras came back into business, and the nine that went out of business were basically chamber orchestras, which is a different kind of issue. So I think that sounds much more draconian than what has actually taken place.

But let me just look at another take. And, first of all, I really agree with the professor that every resolution, every plan, has to be local. It has to be what works for the community and that particular orchestra. But I just take the example of the Los Angeles Philharmonic, if I could for a moment.

When I arrived here in 2000, in that year the orchestra was running a budget deficit, in a single year, of over $7 million. Now, that is very, very serious, and that is the cliff being much closer than any of us want to be to it.

Schaefer:   

So what did you do?

Borda:   

Through a very careful plan, and through working really carefully with the Board, because we haven’ talked about the importance of boards of directors here, the decision to look at a long-term series of solutions, and to invest to get there, was really key to the health of the organization today. So, I think these are of course difficult times, and it’s cyclical. It’s cyclical for every orchestra. Orchestras are a microcosm of society.

Schaefer:   

Did you have to cut costs? Did you have to cut salaries and things like that?

Borda:

No, we did not cut salaries.

Schaefer:   

Hmm. Now let’s just suppose, Deborah, that you woke up tomorrow, not in LA but in Columbus. What would you do with the Columbus Symphony to try to turn that around?

Borda:   

What I would do would be to bring the Board, the orchestra and the community together and I would do something that would be like a critical path study. I would try to isolate what are the very specific issues for that orchestra, and to come up with a variety of strategies to deal with them, and to map out a deliverable financial and artistic plan for the future that had measurements along the way in that road map to say “are we getting there or are we not?” But it is very crucial for people to come together and talk about these things, but in doing so they must understand want is at the root of their particular problem.

Schaefer:   

So “think global and act local”; that sort of thing applies in this case as well?

Borda:   

Absolutely.

Schaefer:   

Bob, let me ask you a final question. With all the material that you amassed over the years that are encompassed in this study, if the orchestras do not change their business model, what’s the future? Is there a future for the orchestra in America as we know it?

Flanagan:   

Oh, I’m quite positive on the future for orchestras. I think the biggest danger is that orchestras that may not be apprised of these results on the economics of the industry would be drawn to single solutions. And, as I state in the conclusions, I think, as you read the orchestra report as a whole, you sense the futility of single solutions. You said at the outset that most orchestra cannot cover their performance expenses by filling their halls; that’s one example. It’s clear from the analyses of marketing expenditures that most orchestra will not solve their problem solely by marketing expenditures, because they run into diminishing returns. There seem to be limits to fundraising expenses, and the data that the orchestras submit indicates that they cannot do it by prudent rates of withdrawal from endowments. So it’s, as Deborah Borda: said, it’s a question of finding a portfolio strategy that works locally, rather than putting all your eggs in one basket.

Schaefer:   

All right. Robert J. Flanagan is the author of the study we’ve been talking about, joining us from the studios of Stanford University, where he is a professor of economics. And we’ve been speaking with Deborah Borda:, the president of the Los Angeles Philharmonic as well. Bob, Deborah, thank you both for being with us on Soundcheck today.

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