The Baltimore Symphony Orchestra is backing off a controversial proposal to eliminate a burgeoning debt by selling its concert hall after learning that the plan would violate Internal Revenue Service regulations on tax-exempt financing.
The proposal had called for the orchestra to sell its home at 1212 Cathedral St. to a newly created nonprofit subsidiary -- and then lease it back. The nonprofit would have issued $30 million in tax-exempt bonds to finance the hall. Once the debt was paid off, ownership of the Meyerhoff would have reverted back to the BSO.
Philip English, chairman of the BSO's board of directors, said the symphony is exploring several options to erase the deficit, born of declining audiences and increasing costs and expected to reach $12 million by Aug. 31, 2008.
"Nothing is off the table," English said of the lease-back proposal, "but new things have come onto the table that are just as realistic."
In hindsight, English said, it was premature to announce the proposal publicly in September before it had been discussed with the full board. Several board members have considerable financial expertise.
"I'm not saying that [the idea of selling the Meyerhoff] doesn't have risk, but I think that risk is justified," English said. "The question isn't what is prudent, but whether we want to see a vibrant BSO. I don't want to see a reduced organization."
The lease-back proposal was put on the back burner after symphony officials learned that the IRS doesn't allow nonprofit organizations such as the BSO to raise funds by issuing tax-exempt bonds for paying down deficits -- they may issue tax-free bonds, however, for a construction project.
Jeff Shapiro, the symphony's chief financial officer, said the BSO could go ahead with the lease-back proposal if it used taxable bonds, a less-attractive option. Having to use taxable rather than tax-free bonds would mean the BSO would have to pay significantly higher interest rates to the bond investors.
The BSO is hoping creative financing can reverse a slide in revenue similar to what has bedeviled orchestras throughout the United States. In 2003, the nation's roughly 1,200 symphonies -- most of which are running deficits -- added $37 million in debt to their strained budgets as a slumping economy stemmed the flow of contributions from individuals, corporations and government grants. The St. Louis Symphony, with an operating budget comparable to the BSO's $25 million, was $10 million in debt in 2000 and on the verge of bankruptcy. It has since rebounded financially. The Detroit Symphony, also of similar size to the BSO, had a debt of $2.2 million in 2004.
Ticket sales nationwide and at the BSO also have plummeted. Attendance at the nation's 23 largest orchestras dropped an average 12.4 percent between 1991 and 2002.
In the 1992-1993 season, on average, 77 percent of the Meyerhoff's seats were filled for a BSO concert. This season, attendance is running 59 percent to 60 percent of capacity once complimentary passes are factored out, according to symphony President James Glicker.
In addition, the BSO faces other challenges, from the search for a new music director of equal stature to Yuri Temirkanov, who steps down at the end of the 2005-2006 season, to a commitment to help raise $30 million for its second home, the $98.6 million Music Center at Strathmore in Montgomery County.
In that atmosphere, any money-generating idea, no matter how unusual, is welcome.
Shapiro outlined a few alternatives the BSO is exploring:
Use the orchestra's endowment as collateral for a loan. From August to December 2004, the value of the endowment appreciated through investments to $85 million from $77 million.
Borrow against the orchestra's existing line of credit to pay off the deficit. "Our line of credit probably is robust enough to handle the deficit," Shapiro said, "but I would hate to carry a line of credit long-term. The true use of a line of credit is to provide working capital. But if we have to use it, we can."
Issue taxable bonds and sell them to the public, or raise money from private sources, such as banks or financial houses. In either case, the payback term would be from 10 years to 15 years.
"The important thing isn't the deficit, or even the size of the deficit," Shapiro said. "It's that the deficit is coming to an end."
Of course, all of these alternatives would involve borrowing extra funds, and that raises the seemingly paradoxical notion of increasing debt in order to eliminate it.
The bailout would save the orchestra money by stretching out the period of the debt. Loans scheduled to come due in the next few years could be extended for up to three decades. The proposals also involve borrowing money at a lower rate of interest than is being charged on the BSO's outstanding loans, Shapiro said.
This strategy is similar to that used by a homeowner who pays off credit cards that carry an interest rate of 15 percent by taking out a home equity line of credit that charges only a 7 percent interest rate. A larger portion of the monthly payment goes toward reducing the principal, which in Shapiro's view, is all-important.
"We have a very strong balance sheet, with an endowment of $85 million and a building worth about $30 million," Shapiro said. "The debt ratio is not unbearable, and the Baltimore financial and business community has been very supportive."
Glicker said the BSO acquired a short-term line of credit to tide the organization over while it decides on the best next step. As for attendance, Glicker said that problem also is solvable.
He noted that the second half of this season is selling more strongly than the first (though he admitted that the schedule was deliberately loaded to stir up enthusiasm for Strathmore by programming more audience favorites in spring 2005 than in fall 2004). In particular, the Symphony With a Twist concerts, which include martinis and jazz in the lobby, are popular. Glicker said 91 percent of tickets for the next two Twist concerts, on Feb. 26 and April 2, have been sold.
The orchestra also received a much-needed morale boost with the grand opening of Strathmore Hall this month. Tickets to the remaining dozen BSO concerts this season at the North Bethesda venue are selling rapidly.
"Revenues are still declining, but we're on target to reach our goal," Glicker said. "In general, I am pretty happy with where we are."