While the Milwaukee Symphony Orchestra has long been regarded as a world-class music ensemble, behind all the acclaim and recognition is a nonprofit organization that has faced significant financial challenges, particularly during recent seasons.
The orchestra – the largest performing arts organization in the state – experienced an especially trying fiscal year in 2010 when its expenses exceeded its revenue by more than $1 million.
MSO balanced its budget the last two years, and the organization is on track to balance its budget for a third time this year, but not without making sacrifices and some tough decisions.
Mark Niehaus, president and executive director of the MSO, took the helm last September after spending 15 years as its principal trumpet player and has largely been responsible for navigating the organization through these tough decisions.
This past fall, the MSO renegotiated contracts with its musicians in a process that ultimately led to its musicians relinquishing a promised raise. Typically the orchestra negotiates contracts every four years with its musicians, who are union employees under the American Federation of Musicians. 2012-13 was year four of the contract, but the MSO renegotiated contracts early last fall with an immediate cash need. According to previous negotiations, orchestra musicians were to receive a raise this year that would elevate their salaries to equal their earnings from four years ago. However, the musicians agreed to give up their raise for the benefit of the orchestra as a whole.
The newly agreed upon concessionary contract was extended for an additional two years and included much more gradual increases in salary. Instead of taking four years to reach musicians’ salary levels from four years ago, as was originally planned, it will now take a total of six years.
“That creates tremendous cash savings for the orchestra,” Niehaus said.
Had the MSO followed through with the promised raises to musicians, its finances would have suffered substantially this year, he said.
“We would have been in a worse cash position than we are right now,” Niehaus said. “It would have had a detrimental effect on our bottom line this season.”
The MSO’s musicians essentially invested in their own organization, according to Niehaus.
“As employees of the organization, they understood the cash consequences to the organization of that raise at that time,” Niehaus said. “This was a vote of confidence on their part that the orchestra would move forward successfully financially.”
Far from alone
MSO musicians are compensated with a salary and benefits package over the course of each 39-week season. Salaries for the 80 musicians range from dollar amounts in the high $50,000s to amounts in the low to mid $60,000s, but compensation changes every year.
Orchestra salaries and benefits account for the MSO’s largest single bucket expense, anywhere from 45 to 50 percent of the nonprofit’s annual budget, which mirrors other orchestras across the country, according to Niehaus.
But while other orchestras in the country have faced similar negotiation conflicts, many of them haven’t been able to reach agreements quite as diplomatically as the MSO.
The Minnesota Orchestra, based in Minneapolis, has battled labor lockouts for almost a year and, as a result, has had to turn to a mediator to try and resolve collective bargaining disputes between management and musicians. The orchestra has also had to cancel a number of summer concerts in the meantime.
Minnesota’s St. Paul Chamber Orchestra was also impacted by a labor lockout this season, and recent labor strikes have hit orchestras in Chicago and San Francisco with additional labor disputes plaguing orchestras in Atlanta, Indianapolis and Louisville.
“Every performing arts organization in Milwaukee and even in this country is facing significant financial challenges right now,” Niehaus said. “This prolonged recession has had an impact not only on philanthropic support as people have seen their personal wealth diminish. It’s also had an impact on ticket sales as people really make careful choices with their discretionary income.”
According to Niehaus, the MSO’s unconventional strategy in including musicians on all board committees has been instrumental in avoiding the bitter labor wars threatening peer orchestras. For the last 20 years, the MSO has made a point to have a governance structure of “openness and transparency” with direct involvement from musicians so that orchestra members are up to speed on current finance issues. Niehaus says his recent move from the stage to the office has also helped keep tension at bay as he has brought a complete perspective of the organization to board meetings.
“We have our challenges, but we are in a much better place than many other organizations when it comes to institutional health,” he said.
Additional financial trials
On top of employee compensation, an underfunded pension has complicated the MSO’s finances. The orchestra is currently obligated to make payments on a pension that was frozen back in 1996. With historically low interest rates, the organization has continued to experience a cash drain in fulfilling pension requirements.
It’s an “albatross from the past,” Niehaus said, and one totaling more than $800,000 this season.
Yet another financial challenge revolves around the MSO’s reliance on its annual fund and philanthropic giving to stay afloat.
“It’s a large part of our income as is true for every orchestra in the country,” Niehaus said.
Capitalization of endowments has posed a particular challenge. While the MSO has one restricted endowment trust totaling $13.8 million and another unrestricted, board designated endowment trust totaling $4.3 million, symphony orchestras in other cities like Chicago have endowments exceeding $200 million.
With a much smaller endowment than other organizations, the MSO has very little investment income. During fiscal year 2012, the nonprofit took a draw of six percent, according to Susan Loris, vice president, marketing and communication, at the MSO.
‘Punching above its weight’
Despite challenges to consistently balance the budget, the MSO has made a very intentional effort to operate more efficiently and cut costs where feasible, Niehaus said.
“I think everyone understands that this orchestra punches above its weight,” Niehaus said. “We do more with less. We have incredible operational efficiencies right now.”
Twenty years ago, the orchestra’s office staff was double its current 33 employees and its cast of musicians contained at least eight more than it does today.
The MSO has also trimmed the span of its season to lighten staff costs and the gamut of operational costs in its control.
The nonprofit began taking a more targeted approach toward efficiency after it failed to balance its 2010 budget, due in large part to revenue projections that weren’t sustainable during the economic downturn.
To recover from its $1 million debt, the MSO secured two challenge grants, boosted contributions with more than 1,200 new donors and increased gifts from 763 existing donors, and transferred $6.5 million in unrestricted endowment funds with approval from the organization’s trustees and board of directors.
Moving forward debt free, the MSO has rolled out a long-range institutional plan focusing on community engagement, patron development, board engagement and sustainability.
In terms of sustainability, the nonprofit held a much smaller credit line this season to force fiscal responsibility and advance giving from donors.
On the community engagement side, the organization recharged its program structure with more pre-concert and post-concert lectures and online streaming of its entire summer broadcast series.
“We’re curating the art form in a way that encourages community engagement,” Niehaus said.
The MSO has an $18.1 million budget for fiscal year 2013 but operates on about $16.1 million once its pension liability and savings in expenses are subtracted, Niehaus said. This budget, the 19th largest among symphony orchestras in the country, parallels MSO budgets from about a decade ago.
Hope on the horizon
Wrapping up fiscal year 2013 on Aug. 31, the MSO must bring in more revenue in the next month to balance its budget, primarily through a pool of corporate, foundation and individual donors.
“We have to (balance our budget),” Niehaus said. “We don’t have the ability to run a deficit. We can’t. We have to balance our budget. We have to be fiscally responsible because we don’t have the ability to borrow money or have a deficit.”
With a reduced credit line, the MSO doesn’t have the option of borrowing needed funds, but Niehaus insists the organization doesn’t have to raise nearly as much this August as in past years.
“We’re in a better place,” he said.
As the nonprofit is seeking additional dollars, it is also seeking a new venue to call home.
The MSO has continued to contend with scheduling conflicts at its preferred venue, the Marcus Center for the Performing Arts in downtown Milwaukee, competing for stage time with other performing arts groups like the Milwaukee Ballet.
Because of the scheduling conflicts at the Marcus Center, the MSO performs some shows at other venues in the Milwaukee area, but according to Niehaus, its profits and audience retention suffers without one central location to host all of its performances.
“It’s not ideal to have to move your product all over town and expect your audience to follow you,” Niehaus told BizTimes in May.
Real estate developer Rick Barrett, founder of Barrett Visionary Development, has approached the MSO about creating a concert hall for the orchestra in The Couture, a proposed 44-story residential and hotel tower that Barrett hopes to build near the lakefront.
The MSO is still studying that possibility and has not yet committed to Barrett’s idea. The decision to move into The Couture, or any central venue, can’t be “a gut decision” or “a knee jerk reaction,” Niehaus said.
“It’s very easy to think that just building a new building is the silver bullet,” Niehaus said. “It isn’t. It may be part of a broader conversation and part of a larger plan to make the orchestra sustainable. We don’t know for sure yet. And regardless of what we do there will be risk involved, and the decisions that need to be made center around that.”
Looking forward, Niehaus says he doesn’t worry too much about the future of the MSO, which he sees as an enduring source of pride for the greater Milwaukee community.
“I cannot envision Milwaukee without an orchestra,” Niehaus said. “I don’t think the people of Milwaukee would allow that to happen. It is the cultural gem of the performing arts.”
