Use Code BALT69 for a $69 Ticket to One Day University on July 9

The BSO's financial situation was much worse than most people realized, documents and interviews reveal

Until the Baltimore Symphony Orchestra canceled its summer season, few people outside the nonprofit’s administrative offices realized just how precarious its financial situation was. But when President and CEO Peter Kjome referred to a promised $3.2 million in state funds as “a lifeline,” he wasn’t exaggerating.

Financial documents obtained by The Baltimore Sun and interviews with three of the symphony’s key decision-makers reveal that the organization’s efforts were predicated on the thinnest of margins — and wishful thinking.

Without the funds promised by the state to support the summer season, the orchestra would end its fiscal year with an approximately $1.5 million deficit. Even with that money, the symphony would conclude that year on Aug. 31 all but broke — and that’s assuming that the funds were released promptly, that the organization obtained a bridge loan and that nothing else went wrong over the summer.

The documents also reveal that the crisis was created in part by fundraising that fell well short of projections.

In addition, the organization awaits an audited financial statement that will determine whether it is “a going concern” — a decision with potentially significant implications for the symphony’s future.

“We are all very disappointed and saddened that we are in this situation,” Kjome said. “We all want our community to be home to an exceptional orchestra for many years to come.”

In hindsight, asking the General Assembly for more money was a desperation move, the classical music equivalent of a Hail Mary pass. From the time Del. Maggie McIntosh, a Baltimore Democrat, introduced House Bill 1404 in late February, the odds were it wouldn’t achieve its intended goal of keeping the orchestra playing through the summer.

Interviews with Kjome; Barbara Bozzuto, chairwoman of the symphony’s board of directors; and Sarah Beckwith, the organization’s chief financial officer, reveal that the BSO had a tiny window of time after the bill became law to either obtain the state funds or arrange a bridge loan to mount the slate of summer concerts it announced in late April.

“We were candid when we talked about the severity of our cash flow issues,” Bozzuto said. “But in retrospect, we could have been even more forceful.”

On May 30, the Symphony abruptly canceled the summer concerts it trumpeted just five weeks earlier. Orchestra management resurrected a proposal to slash its season from 52 weeks to 40 — and hack musicians’ pay roughly 20 percent, leaving 75 people with mortgages or rents, tuition payments and medical bills two weeks to come up with alternate sources of income. Kjome cited $16 million in losses over the past decade.

“We thought we were going to have a lifeline of $1.6 million soon,” Kjome said of the state funding it was due in the state fiscal year starting July 1. “We care deeply about our musicians, but it was necessary to make the decisions we did due to the severity of our financial challenges.”

McIntosh was taken aback when she learned that the summer season had been canceled after weeks of hard work on her part.

“At no point did I get that this dramatic action would be taken,” she said. “Nobody ever said that. Everybody was then shocked that as of July 1, they’d run out of money. That was never a part of any discussion.”

A BSO cash forecast dated Dec. 7, shows the arts organization anticipated it would close its fiscal year about $1.2 million in the hole. By April 19, a new cash forecast projected the deficit for the year to increase to $1.51 million, largely because contributions hadn’t kept pace with projections.

“Results from contributed revenue this year have been low,” Kjome acknowledged.

He said that fundraising for the prior fiscal year, “was extremely strong,” and that several of those donors said they wouldn’t be able to maintain that level of support every year.

(Last summer, the orchestra toured Ireland and the United Kingdom. Funds for the trip did not come from its operating budget but were raised specifically for the tour.)

Greg Mulligan co-chairman of the BSO Musicians Players Committee, thinks that possible donors were angered by the proposal to shorten the season, which first was discussed last fall.

“There have been large donors who have told us that they’re not going to give their legacy gifts to the BSO this year...,” he said. “We think there is money sitting on the sidelines waiting for the contract dispute to be resolved.”

The BSO’s annual operating budget draws roughly $3.6 million a year from its $60 million endowment to support its operations. If the BSO could increase its endowment to $100 million, Kjome has said, it could draw almost $2 million more a year — or roughly the sum needed to break even at the group’s current spending levels, assuming its current donation rate remains constant.

But longtime donor Joseph Meyerhoff II, a member of the symphony’s endowment board, wrote in a letter to the editor that the large donations the BSO needs are nearly impossible to secure.

“The Meyerhoff family offered a $4 million challenge grant in 2017-2018 to raise funds for the endowment. We met with or called every large foundation in Baltimore and at least two dozen of Baltimore’s wealthiest citizens. We came away empty-handed. No one was interested in investing more than $250,000 in the BSO, when it needs multi-million-dollar gifts.”

Orchestras nationwide face daunting financial challenges inherent to performing a canon of music composed for a full-sized orchestra of between 70 and 100 musician, said Robert J. Flanagan, professor emeritus in the Stanford University Graduate School of Business. (The BSO’s roster includes 75 players.)

“Probably the most fundamental problem that orchestras face is when budgeting isn’t done realistically,” said Flanagan, author of the 2012 book “The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges.”

“Instead,” he said, “budgets are based on unrealistic hopes of what the revenues will be rather than what past history shows the revenues are likely to be.”

Flanagan emphasized that he isn’t familiar with the BSO’s finances. But he said that “it’s reasonable to surmise” that an orchestra that has experienced $16 million in losses over the past decade has been hampered by flawed and inaccurate budget assumptions.

After House Bill 1404 passed both houses of the General Assembly, the first-year appropriation of $1.6 million was penciled into the BSO’s forecast, Beckwith said.

Had the symphony received the additional state funds, it would have ended its fiscal year with not quite $90,000 in the bank — assuming it could bring in a projected $3.8 million in contributions in the last five months of the fiscal year. For an organization with a $28 million budget, ending the year with so little money is scraping the bottom of the barrel.

“We’d have had a very small amount in our operating accounts,” Beckwith acknowledged. “We’d have been able to barely balance the budget.”

Such a tight budget is not unusual in the arts community, said Randy Cohen, vice president of Americans for the Arts.

“A lot of arts organizations work very close to the margins. That’s just a fact,” Cohen said. “Every year as much as a third of arts institutions carry some kind of operating deficit.”

Compounding the problem, the symphony had just two months — July and August — to secure the first-year allocation of $1.6 million.

Launching the summer season and paying the musicians through it would have required taking advantage of the difference between the state’s and the BSO’s respective fiscal years.

The first $1.6 million installment was allocated to be distributed during the state’s 2019-20 fiscal year, which begins July 1. But the Symphony’s current budget year with its anticipated $1.5 million shortfall runs through Aug. 31. If the orchestra either received the $1.6 million in July or August or received a guarantee that the funds would arrive soon, it could have borrowed against its future windfall to meet its “urgent” current obligations, Kjome said.

The symphony’s leaders experienced a surge of optimism May 24, when it became clear that House Bill 1404 was not on Hogan’s final list of vetoes. But their relief was short-lived.

“We have had conversations with a number of leaders in Annapolis,” Kjome said. “After the bill became law, there were additional conversations about the timing of when the allocation would be authorized.”

The short answer was that it wasn't clear when or even if the $1.6 million would become available.

Instead, Kjome, Bozzuto and Beckwith were told that the governor was hesitating to release funds for several projects, of which the BSO’s $1.6 million grant represents just a fraction.

Hogan, speaking at an event Thursday in East Baltimore, said he would “probably not” release the money. He said the orchestra already has received plenty of state assistance, the most of any arts group in the state.

The $1.9 million the orchestra already received this year is more than 74 percent greater than the next highest grant recipient, the Baltimore Museum of Art, according to Michael Ricci, Hogan’s director of communications. Hogan’s administration also provided a $750,000 grant to the symphony last year. Ricci said those funds were intended to be “one-time relief” while the organization made structural changes.

“We continually pour millions and millions of dollars into the BSO, but they’ve got real serious issues and problems with the management, with losing the support of their donor base and the legislature took the money out of the budget and fenced it off,” the Republican governor said. “So I don’t know what the resolution is going to be.”

While House Bill 1404 became law May 28, the BSO board voted unanimously at a special May 29 meeting to cancel the summer concerts and renew efforts to reduce the orchestra from a 52-week to a 40-week ensemble, Bozzuto said. (Whether musicians are paid for a 40-week season or a 52-week season is a matter for contract negotiations. When concerts are scheduled is not.)

Making the situation even more perilous is that the orchestra’s most recent audited financial statements, for the fiscal year ending Aug. 31, 2018, have not yet been released. In that document, which orchestra officials expect to be completed in weeks, the auditors will either declare that the BSO continues to be a “going concern” with sufficient resources to remain in business or it’s not.

A determination that a business or organization is not a going concern is extremely rare, according to J.P. Krahel, an associate professor of accounting at Loyola University Maryland.

“Usually an audit is not meant to judge the quality of a business,” Krahel said. “It usually just says that what the business is telling you is honest.

”The exception is that if the auditors feel the business might not survive, they’ll put a note to that effect in the audit opinion as a warning to potential lenders. It is essentially the kiss of death. It means that the business is already on life support and it would be pulling the plug.”

Kjome said the orchestra is in discussions to borrow $1 million from the state to support its current operations.

“It is very important to all of us that when our audited financial statement is issued that it reflect the fact that the BSO will continue to serve our community and operate for many years to come,” he said.

The musicians, meanwhile, fear the paycheck they received Friday will be their last until the fall and health insurance will run out July 1.

Austin Larson, a horn player for the orchestra, said musicians initially were dumbfounded and then furious by the news of the summer season’s cancellation.

“The musicians went through such great lengths to get this bridge funding through to help the orchestra out,” he said. “The whole idea behind the bill was to keep the orchestra playing. How can we trust management in the future after they have betrayed us like this?”

Baltimore Sun reporters Luke Broadwater and Pam Wood contributed to this article.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
75°