Orchestra recovery plan depends on raising money - a lot of it

Posted: September 22, 2012

The Philadelphia Orchestra Association's 15½ months in Chapter 11 lowered some expenses, removed pension-funding risk, and eliminated a modest amount of debt owed to vendors.

But seven weeks after exiting bankruptcy, the organization that presents the world-renowned ensemble is far from fiscally secure.

The association, with a $45.5 million annual budget, has only about $3.7 million in cash on hand, says board chairman Richard B. Worley. Ticket income will be freed from escrow as performances start taking place in October. But even then, the orchestra is betting its future on as-yet-unidentified donations - and that money must come this fall, Worley says.

In an interview last week, he said, "We are not in panic," but added, "We are operating with more uncertainty about the timing of cash flow than I would like, and with less margin of error."

The orchestra's recovery plan relies on raising, quickly, as much as $200 million.

The funding climate is tough, but progress is being made. Since filing for bankruptcy in April 2011, the orchestra has raised $40 million for its recovery fund, a pool of money used to cover the gap between expenses and income. Most of that has been spent, but in the next two years, almost $10 million in pledges is scheduled to come in.

Much more, though, is needed.

The orchestra must raise $45 million in new money over the next four years (in addition to its regular annual fund-raising) - $25 million of that in the next 12 months. That would put the total for the "transformation fund" at $85 million, about $15 million more than initially thought.

That money would be used to rebuild operating capital (cash on hand), underwrite forecast deficits of $18.7 million for the next two years, pay off liabilities, finance new initiatives, and reserve $3 million for contingencies.

The hope, Worley said, is to get beyond the crisis mode that has gripped the organization for much of the last two decades: "We want to give our recovery the best chance possible."

Asked whether he thought the orchestra could succeed in raising the next $45 million, he said, "We intend to do it. I believe that we will."

But the $85 million rescue is just a prelude to putting the orchestra in a position where it can increase ticket income and annual giving, and raise enough endowment to correct the "structural deficit" for good.

The exact amount needed in new endowment has not yet been set, although the goal is likely to exceed $100 million. Figuring on a standard 5 percent "take" - that is, the amount of investment income removed from endowment in a given year - an additional $100 million would provide an added $5 million a year.

The orchestra's current endowment market value is about $115 million.

Donors will want to see enthusiasm in the hall and an increase in attendance. Last season, the orchestra lowered ticket prices and saw paid attendance increase to 83 percent of capacity, from 77 percent the year before. But the increase in attendance did not make up for the lower ticket prices - ticket revenue fell to $7.1 million from $7.9 million the year before.

Ticket prices aren't increasing substantially for 2012-13 - just 2 percent on average across the house - with the orchestra aiming for a slight increase in attendance. So far, the number of tickets sold totals 112,000, against 107,000 the same time last year, about a 4 percent uptick.

This is the inaugural season for the orchestra's eighth music director, Montrealer Yannick Nézet-Séguin, and such seasons typically spark curiosity that brings a boost in attendance.

But unlike the multimillion-dollar budgets that president Allison B. Vulgamore says have accompanied music-director launches at other orchestras, Philadelphia's came with only a small increase in the marketing and advertising budgets. The orchestra believes it can lure listeners from the New York area - even though it already maintains a Carnegie Hall season - and took out a full-page advertisement in the New York Times' fall arts-preview section. The ad was underwritten by an orchestra board member, Vulgamore said.

In the area of growing the younger segment of its audience, the orchestra sees promise in the fact that last season, a new Young Friends group of listeners younger than 40 attracted 400 members.

Most significant, perhaps, is that about 10 percent of these are alumni of the orchestra's eZseatU program, in which college students pay a flat fee of $25 a season and are ushered into unfilled seats just before curtain time.

The program brings in from 100 to 300 college students per performance, but the question had always lingered: Would any of them ever become orchestra subscribers?

Orchestra marketing vice president Janice Hay called it a "small but encouraging sign that our eZseatU users were graduating, if you will, to paid tickets throughout the season. We're trying to build on that."

The goal of the bankruptcy was to bring down some expenses, which has happened. Now, the focus is on increasing revenue. But if the orchestra can't bring in the kind of donations it is seeking, can it once again look at the expense side for further cuts?

"Yes and no," said Worley. "If we abandon our ambition for doing things better, we could hunker down and spend less money. But I think that the expense budget of the orchestra, when you look in places where expenses are growing, they are growing almost entirely in activities that we think will reduce the total cost of the undertaking in the long run - because we think it will help grow revenue and contributed income."


Contact Peter Dobrin at pdobrin@phillynews.com or 215-854-5611. Read his blog at www.philly.com/artswatch.

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