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While BSO’s financial performance has improved, it has continued to spend more money than it is bringing in, according to a newly released audit.
While BSO’s financial performance has improved, it has continued to spend more money than it is bringing in, according to a newly released audit. (Amy Davis / Baltimore Sun)

An audit of the Baltimore Symphony Orchestra released late Tuesday suggests that the arts group is in such grave financial straits that neither the legislated cash infusion from the state nor the reduced expense of a shortened season might be enough to save it.

The audit, conducted by SC&H Group and dated July 15, examines whether the cash-strapped symphony could be buoyed by $3.2 million allocated this spring by the Maryland General Assembly and a proposal to trim the season from 52 weeks to 40 accompanied by a roughly 20 percent pay cut for the performers.

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The audit bolsters the contention that both fixes — particularly the proposed salary reduction — could improve the symphony’s bottom line. But the audit also suggests that unless the symphony can find other sources of revenue, either remedy or both combined would at best be short-term solutions, the economic equivalent of band-aids.

”Management believes that the restructuring of the season ... will improve its operating results," the audit says. "However, there is no assurance that the orchestra will be able to generate sufficient resources to fund its future operations.”

The BSO initially released a press release Monday describing the audit, but not the document itself. After multiple requests from journalists and a Baltimore Sun editorial calling for its release, the orchestra shared the audit late Tuesday.

It contains a bombshell opinion couched in dry accounting terms, concluding: ”These factors raise substantial doubts regarding the symphony’s ability to function as a going concern."

In other words, the auditor expressed doubt that the BSO has sufficient financial resources to remain in business for one more year. Such a gloomy financial report card is rare — and comes with serious consequences, making it more difficult for an organization to attract donations and borrow money.

The audit also questions whether the BSO will receive any of the $3.2 million in state emergency funding intended to tide the organization over until a working group could identify potential permanent solutions. Despite the General Assembly’s action, Gov. Larry Hogan has refused to release the first year’s installment of $1.6 million, citing concerns that Maryland could soon face a $961 million deficit.

”It has been confirmed that the funds for the state’s 2020 budget [the current 2019-20 fiscal year] will not be released,” the audit said, “and it is uncertain whether the funds for the 2021 budget will be made available or if the funds expected to be received under the act will meet the current cash needs of the symphony.”

The symphony has been in turmoil since Hogan initially signaled in late May that he might not release the funds set aside for the BSO for this fiscal year.

On May 30, the symphony abruptly canceled the summer series of concerts it had announced five weeks earlier. On June 17, the organization locked out its 75 performers, with whom it is attempting to negotiate a new collective bargaining agreement. Most musicians received their last paycheck for the summer three days earlier. The turmoil ignited a fierce public debate about the 103-year-old organization’s future.

Brian Prechtl, co-chairman of the Players Committee representing the musicians, said the union is still absorbing the implications of the audit. But he said that the proposal to balance the budget by cutting salaries is “a very superficial solution to the problem.”

He cited the example of the Bethesda-based National Philharmonic Orchestra. The 40-year-old regional orchestra announced Tuesday that it will shut down, throwing more than 130 musicians and administrators out of work.

“The National Philharmonic tried a lot of the same things that BSO management is advocating,” Prechtl said. “They cut concerts, and people got less excited about the orchestra and it went belly-up. Just looking at cost savings is incredibly short-sighted, especially for an organization like the BSO that depends so heavily on donations."

SC&H Group, which referred questions about the audit to the BSO, examined the financials of several related entities, including the BSO, the Baltimore Symphony Endowment Trust and Cathedral Parking Inc., the garage near Meyerhoff Symphony Hall owned by the organization.

The audit pointed out that even though the BSO’s financial performance improved last year, it continued to burn through more money than it generated,. The document revealed a growing deficit in so-called unrestricted net assets — essentially the money the BSO has available to spend.

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Among the highlights of the audit:

>> The BSO generated $10.9 million from concerts, hall rentals and other operations in its 2018 fiscal year, up from just under $10 million the year before. However, that money came nowhere near covering the symphony’s operating expenses of $31.6 million, which is why it relies on donations, grants and money from its endowment to close the gap.

Yet the symphony’s shortfall from its operations and that essential fundraising soared 66 percent in its 2018 fiscal year. The shortfall in those unrestricted net assets was $774,000 for the fiscal year that ended Aug. 31, 2017. Twelve months later, that loss increased to $1,286,000.

“This is the equivalent of a for-profit business reporting an operating loss,” said J.P. Krahel, an associate professor of accounting at Loyola University Maryland.

>> Such losses ballooned the symphony’s deficit in unrestricted funds ― essentially the money the BSO has available to spend ― to $1.4 million at the end of the 2018 fiscal year, from $140,000 a year earlier.

>> Yet, the BSO’s total assets increased by about $1.5 million to $106.3 million for the fiscal year ended Aug. 31. 2018; the majority of those funds, however, are off-limits because they’ve been designated by donors for a specific purpose.

“A big portion of the assets that the BSO has are unavailable,” Krahel said. “They can’t withdraw that money to pay their employees or vendors.

>> Most of the money the symphony spends goes toward producing concerts. Of its operating expenses of $31.6 million, $15.2 million went to artistic personnel and $9.4 million to producing and operating concerts.

Greg Mulligan, co-chairman of the BSO Players Committee, said musicians’ salaries last year totaled $11.2 million.

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Trimming the musicians’ salaries by 20 percent would save the orchestra $2.24 million.

Mulligan said that extravagant spending contributed to the symphony‘s financial difficulties, including the orchestra’s tour of the United Kingdom in the summer of 2018, and the centennial celebration two years earlier.

“The BSO threw itself an expensive birthday party and went on an expensive tour,” he said. “Than they demanded that the musicians pay the bill.”

>> The losses mounted even though grants from public governments increased 26.7 percent last year, to $4.3 million. The BSO receives funding from the state of Maryland, from the City of Baltimore and from Baltimore, Carroll, Howard and Montgomery counties.

>> The audit documents the BSO’s escalating debt to the endowment that was created to sustain it. So dicey is the BSO’s cash flow situation, the audit concluded, that the Baltimore Symphony Endowment Trust has essentially written off the larger of two loans to the symphony and provided extremely favorable repayment terms for the smaller, remaining loan.

During the 2015-16 fiscal year, the BSO borrowed $2 million from the endowment, according to the audit. A year later, that loan was increased to $5 million. With interest, the total owed on that loan was $5,102,000 as of Aug. 31, 2018.

“There is substantial doubt about the orchestra’s ability to repay the loan balance due to the Endowment Trust,” the audit concluded. “The Endowment Trust has recorded an allowance for doubtful accounts totaling $5,102,000.”

In other words, Krahel said, the endowment isn’t just assuming that they won’t get repaid all of the total $5.1 million loan that it is owed.

“They’re assuming they won’t get repaid any of it,” he said.

Nonetheless, the Endowment Trust lent the BSO an additional $2.3 million earlier this year and agreed to defer repayment of principal and interest until at least Sept. 1, 2020.

Krahel said that the audit acknowledges that Kjome and the board of directors are taking steps to address the organization’s financial challenges.

As he summarized it:

"The audit is saying: ‘There are some good things that might happen in the future that could improve the BSO’s financial situation. But they might not improve them enough.' ”

A negotiating session between the management and musicians scheduled for Wednesday ended without significant progress, both sides reported.

No further negotiating sessions have been scheduled.

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