Can bankruptcy fix orchestra? Yes, it's the best chance

PAUL LACHINE
PAUL LACHINE
Posted: May 18, 2011

By Richard B. Worley

The Philadelphia Orchestra is in a financial crisis, and the board of directors believes bankruptcy gives us the best chance to save it.

Our financial problems did not develop overnight, but they have intensified in recent years. And as much as we regretted this decision, running out of money and going dark was a poor alternative.

We have a plan to revive the orchestra, but we need relief from contractual entanglements that threaten our existence. We will also need substantial support from Philadelphians who value the orchestra's contribution to the city's quality of life.

No single factor motivated our decision. For years, our costs increased as revenues declined, and our operating deficit is expected to reach $14.5 million this year. In the face of such deficits, we drew down our unrestricted endowment and, as that dwindled, raised $15 million in emergency funding from the board and a small group of donors.

Today, our unrestricted endowment is nearly exhausted, our emergency fund has also been depleted, and our cash reserve has fallen to $3 million. Absent additional funding, we will run out of money soon.

Our costs are too high, but the basic cause of our financial problem is declining revenue. The audience is the lifeblood of the orchestra, providing ticket revenue and a vital donor pool. But over the last two decades, attendance has declined from 250,000 to 150,000 annually, and half of that decline has been in the last five years. As a result, ticket revenue has declined to only a third of expenses, and donations have fallen to half the level of other major orchestras.

The community must understand that our financial problems are real, life-threatening, and beyond the capacity of the board to cure alone. Our decision was no clever trick to remedy a problem we could have solved outside bankruptcy.

A few myths must be dispelled. First, the notion that potential major donors offered to help only if we filed for reorganization is simply not true. This decision was made by the board alone after months of consideration.

Second, the orchestra does not have $140 million in assets to meet obligations. The orchestra and the Academy of Music together have $140 million in restricted endowments. We are limited by law and donor restrictions to spending only the income from endowments, not the endowments themselves. And spending the endowments, even if allowed, would be a path to ruin, shrinking income and our ability to attract endowment gifts.

Finally, our pension challenges are enormous and complex. We are in discussions with the musicians about withdrawing from our multiemployer pension plan and finding a better, more cost-efficient alternative. We believe staying in the current plan, which is at critical status, will saddle us and the musicians with high costs, low benefits, and credit risks. And we want good, strong pensions so we can attract and retain the best musicians in the world.

Outside bankruptcy, our liability for withdrawing from the pension plan is estimated at $23 million to $30 million - money we don't have. In bankruptcy, we may be able to withdraw for substantially less without harming the musicians.

We face real challenges, but we have a plan to reverse the trends and return to long-term stability. It focuses on artistic initiatives, customer and patron service, increased marketing, and rebuilt fund-raising capacity.

We intend to rebuild our audience by continuing to perform at the highest level, presenting exciting programs and guest artists, and innovating. We will also need to raise significant sums from the community. The board will contribute more, but we will also need others' support.

This is an important moment not only for the orchestra, but for Philadelphia. Cultural institutions exert a civilizing influence on the life of a city. Much is revealed about a city's character by how it values, nurtures, and preserves these fragile institutions.

The Philadelphia Orchestra is one of our greatest cultural treasures; losing it is simply unthinkable and unacceptable. The eyes of the world are on us, and we need your help.


Richard B. Worley is chairman of the board of the Philadelphia Orchestra Association. For more information, see www.philorchtoday.org.

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