Annenberg Foundation tightens rules on $50M given to orchestra

Posted: May 31, 2012

To a greater degree than before, the Annenberg Foundation is requiring accountability from the Philadelphia Orchestra in exchange for the $50 million gift the foundation made in 2003.

That grant was the largest in the orchestra's history. But even after it was paid out, its use and destiny were never entirely left to the orchestra. The foundation reserved the right to recall the gift and any accumulated investment income if the orchestra ever filed for bankruptcy.

Although the philanthropy, now based in Los Angeles, did not exercise that right when the orchestra filed for Chapter 11 in April 2011, a new and more controlling donor agreement has been crafted as part of the reorganization plan filed last week by the orchestra in U.S. Bankruptcy Court.

All of the money, in fact, will be removed from the orchestra's endowment and placed in trust, held by the Northern Trust company for the benefit of the orchestra.

The change got a nod from Lawrence Barth, the Pennsylvania senior deputy attorney general. It is part of the orchestra's reorganization plan, which is expected to go before U.S. Bankruptcy Judge Eric L. Frank for approval.

Orchestra leaders said the idea of moving the money into a trust came from the Annenberg Foundation, which was concerned early in the bankruptcy about threats to the endowment by creditors.

"When this discussion started, we had exactly the same concerns Annenberg did - we didn't want their money going to the AFM-EPF [the national musicians' pension fund] or Peter Nero [and the Philly Pops]. We wanted it to remain in perpetuity for the orchestra," said orchestra lawyer Lawrence G. McMichael. "They had the idea of putting it into a trust, and we said great."

One of the stipulations of the new agreement is that the orchestra exit bankruptcy by June 30, sooner than currently projected. McMichael said the orchestra would now propose a June 27 confirmation date to the court, but if the court cannot accommodate that schedule, the orchestra will request an extension from the foundation.

As before, the foundation has the right to recall the money - nearly half the orchestra's endowment - if the orchestra declares bankruptcy, and the new agreement contains adjusted proportions regarding the percentage of investment income on the $50 million the orchestra may use each year in various categories (artistic endeavors, touring, media/technology, education.)

It gives the orchestra greater flexibility in how the investment income is spent, McMichael said.

Potential default items

But the Annenberg Foundation now has the option of new controls. If the orchestra defaults on certain requirements, "the trustee shall, at the written direction of the foundation, distribute the entire remaining principal and accumulated income" of the trust to the foundation.

"The foundation intends that the orchestra shall retain its status as one of the premier orchestras in the world, consisting of top musicians in the world, internationally acclaimed performances and an internationally renowned conductor," the agreement states.

To that end, the foundation lists several items of potential default:

Lack of a balanced budget.

Failure to make "adequate annual progress" toward fiscal year 2016 goals defined in the orchestra's strategic plan.

Failure "in the reasonable discretion of the foundation" to find an acceptable replacement CEO within a year of any vacancy, with assurances that any new CEO be "able to operate the orchestra in such a manner as to maintain its status as one of the premiere orchestras in the world."

Another section of the agreement states that the orchestra is required to perform no fewer than 150 times per year; that not later than 90 days after emerging from bankruptcy the orchestra must adopt a strategic plan for the years 2012 to 2016 that is "reasonably acceptable to the foundation"; and that the orchestra increase the amount given by "at least a majority" of board members to $20,000 per year and adopt increases to that amount in the future.

The orchestra is also required to keep its annual budget to $46,700,000 (exclusive of any revenue-neutral or -positive tours or initiatives) in fiscal year 2016; raise $2 million in annual board giving by 2016; and achieve "an appropriate increase" in ticket sales and subscribers through 2016 and beyond.

Orchestra president Allison B. Vulgamore says some of the ideas were taken from the orchestra's strategic plan, and others came from Annenberg. The foundation's executive director, Leonard J. Aube, did not respond to requests for comment.

'It came from us'

"While it has some additional benchmarks and milestones, they were related to our plan; it came from us. They are fundamentally investing in the quality of this organization," Vulgamore said.

The new agreement gives the trustee the right to invest the principal, but it is required to do so in consultation with the orchestra's investment committee. McMichael said that even after several years of market fluctuations and spending of investment income, the Annenberg portion of the endowment is still near its initial valuation of $50 million. A spokeswoman for the Chicago-based Northern Trust said she was "unable to confirm" that the money manager has a relationship with the Annenberg Philadelphia Orchestra Trust, as it will be known.

Reports tracking the orchestra's advancement will be filed, and orchestra and foundation officials will meet each year on or before Sept. 1 to discuss progress.

Some of the orchestra's other endowment funds are already held in trust, and Vulgamore said she welcomed this change.

"What I would tell you is, this was a little like a family sitting down and saying: 'How do we want to hold our assets? Let's be smart about this.' "


Contact Peter Dobrin

at 215-854-5611 or pdobrin@phillynews.com.

Read his blog at www.philly.com/artswatch.

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