Palo Alto Weekly

- October 12, 2012

An unfinished symphony

Stanford scholar Robert Flanagan digs into the financial troubles of American orchestras

by Gennady Sheyner

"The Perilous Life of Symphony Orchestras," by Robert J. Flanagan, Yale University Press, 240 pp., $50

When the Philadelphia Orchestra announced in April 2011 its plan to file for Chapter 11 bankruptcy, the news thundered through the arts community in the City of Brotherly Love like a gong in the middle of a Chopin sonata.

Since its founding in 1900, the beloved institution has risen to prominence as one of the nation's Big Five, along with the New York, Boston, Chicago and Cleveland orchestras. But with expenses hovering far above revenues and labor concessions out of reach, the orchestra's trustees decided that bankruptcy was the only way to close a gaping deficit. It became the largest orchestra in the nation's history to file for Chapter 11.

To those who have been tracking trends in the symphonic scene, the move probably didn't seem so jarring. Orchestras have never been cash cows. Even in the best of times, ticket sales have consistently failed to cover performance costs, forcing musicians to rely on patrons, endowments and government grants for sustenance. These revenue sources become particularly critical during economic downturns, just as they become scarcer.

Still, bankruptcies have been limited largely to smaller organizations: the Louisville Orchestra in 2011, the Honolulu Orchestra in 2009 and the Florida Philharmonic Orchestra in 2003. Philadelphia's was remarkable because of the prominence of the institution.

The financial crisis for orchestras has many sources, including unsustainable labor costs, a diminishing audience, a sluggish economy and dwindling government support.

So what's an orchestra to do? That's the question at the heart of "The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges," a new book by Stanford professor Robert Flanagan. By collecting and analyzing data from dozens of American orchestras large and small, Flanagan offers a sober-minded and, as the title implies, sobering look at today's symphony scene.

With an accountant's precision, he tracks the orchestras' historic trends, pores through their financial books, and carefully tracks current and historic levels of private contributions, endowments, musician salaries and government support. He compares the business models of America's orchestras to their counterparts abroad, analyzes the labor trends in the symphony scene and segregates the short-term impacts of economic recessions from the longer-term effect of the "cost disease" inherent in their business models. What emerges is a portrait of an industry filled with interrelated problems and few good solutions.

Not all of these problems are unique to orchestras. The most basic pitfall — expenditures that rise faster than revenues — is familiar to the auto industry, to name one of many possible examples. But orchestras have one distinct disadvantage. A carmaker may lay off workers or seek cheaper parts abroad; an orchestra can't outsource its woodwind section to China during a performance of Beethoven's "Ode to Joy." A carmaker can adopt technology to boost efficiency and improve the company's productivity — the only sure-fire way to keep up with rising labor costs. But a concerto will take just as long to play during the good times and the bad.

This "cost disease" has become more irksome over time, as labor unions have begun to flex their collective-bargaining muscles, prompting labor costs to climb. Becoming a symphony musician is an arduous, highly competitive ordeal, with the supply of trained musicians far exceeding the demand. But, as Flanagan shows, those who make it tend to do well. In fact, as his analysis indicates, over the past two decades musicians' compensation has been climbing at a faster rate than that of other professions. He found that since 1987, the salary increases for orchestra musicians in his sample of American symphonies averaged 4.2 percent per year, compared to the 3.6 percent in salary increases received by other union and nonunion employees in the United States, on average.

"Pay increases for orchestra musicians also exceeded the pay gains of university teachers and health workers, who also work in sectors that have low productivity gains but face much stronger demand," Flanagan writes. "In short, the pay of orchestra musicians not only kept up with pay increases elsewhere in the economy, as suggested by the cost disease argument; their pay also increased more rapidly than the pay of most other groups of workers in the United States in the late 20th and early 21st Century."

To make matters worse, Flanagan found that the wage increases musicians receive weren't correlated with the orchestra's financial performance. Instead, they were generally linked to how much the orchestra has received in private donations — hardly a formula for long-term stability.

Unsustainable labor costs aren't the only problem. Audiences have been decreasing steadily but consistently, despite growth in the general population. According to a National Endowment for the Arts survey that Flanagan cites, 13 percent of polled adults reported in 1982 that they had attended at least one classical-music concert in the past year. By 2008, that number dropped to 9.3 percent. Performance revenues made up 48 percent of orchestras' total revenues in 1982, then fell to 37 percent in 2005.

Communities such as Philadelphia and Detroit, which have seen significant population declines, have been hit particularly hard. Interestingly enough, Flanagan found that a community's population plays a much greater role in orchestra attendance than factors such as per capita income or unemployment. Unfortunately for orchestras, that is one factor that they have absolutely no control over.

Flanagan's book offers plenty of advice for easing the financial pain through prudent financial management. A board of directors should diversify its orchestra's investment portfolios and institute conflict-of-interest policies to promote prudence (shockingly, only 60 percent currently have such policies). An orchestra manager should create more differentiation in ticket prices (that is, charge more for the most preferred seats and less for the least preferred ones) to get the most per ticket. Musicians should be aware of the orchestra's financial picture when making compensation demands during negotiations.

But he also emphasizes that there is no "silver bullet" and cautions of "the futility of a single solution." Raising performance revenues, for example, may narrow the gap but it would take much more to eliminate it. "Even filling the concert hall — an ambitious goal for an industry usually selling 70 percent of its capacity — would not eliminate deficits at most orchestras," Flanagan writes.

The same can be said about nonperformance income such as donations and government subsidies. Flanagan concludes that nonperformance income growth alone is "unlikely to cover future structural budget deficits, unless supplemented with actions to narrow the deficit itself by both raising the growth of performance revenues and slowing the growth of expenses."

Flanagan's book is unlikely to cheer up a fan of classical music. It offers a rare and unsparing look inside a troubled industry where backstage problems often get obscured by front-stage polish. Some sections may sound a bit wonky for a general reader unconcerned about the methodologies trustees use in investing endowment proceeds, but anyone interested in getting the story behind the recent rash of orchestra bankruptcies will find plenty to like here.

But as "perilous" as the lives of symphony orchestras may be, Philadelphia's experience also offers a glimmer of hope. On July 30, after more than 15 months of negotiations, the orchestra officially came out of bankruptcy with a plan that includes labor concessions; reduced rent from the Kimmel Center, the concert hall where the orchestra performs; and greater oversight over investments by the philanthropy group Annenberg Foundation.

Some issues remain unresolved. There are contested claims from creditors and concerns about the departure of some musicians unhappy about the new labor conditions. But orchestra administrators were happy to announce that the deal "addressed more than $100 million in claims, debts, and liabilities with a settlement of $5.49 million" and that the music is resuming this month, when the orchestra launches its new season.

For all the gloom and doom, a requiem for American symphony orchestras would be premature.

Staff writer Gennady Sheyner can be emailed at gsheyner@paweekly.com.

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