BSO taps endowment to clear millions in debt
The Baltimore Sun
March 30, 2006
By Tim Smith
Sun music critic
The Baltimore Symphony Orchestra's board of directors has approved a plan to wipe out debt and provide fresh cash reserves for the next fiscal year by drawing upon nearly one-third - $27.5 million - of the organization's $90 million endowment.
The unusual action will put the BSO back in the black after several years of operating at a deficit, a figure expected to exceed $16 million by the end of the current fiscal year. As part of the plan, $62 million will be transferred to a new trust fund managed by an independent board of trustees, a principal that cannot be touched.
"We will pay off all accumulated deficits," BSO board Chairman Philip D. English said yesterday, "and the association will start the new fiscal year in September with cash reserves of roughly $8 million."
The move comes two months after the abrupt resignation of BSO President and CEO James Glicker and about six months before the expiration of the musicians' contract.
Persistent deficits have been a cloud over the BSO, even while the orchestra has enjoyed the successful addition of a second concert hall in Montgomery County. Eliminating the red ink is expected to put the BSO on firmer ground as it gears up for the start of a new artistic era with the arrival next season of music director Marin Alsop.
"It is very hard with an accumulated deficit of [the BSO's] size to manage and plan the future," said Henry Fogel, president and CEO of the American Symphony Orchestra League and former administrative head of the Chicago Symphony Orchestra. "These are the steps I would take under the circumstances."
W. Gar Richlin, a Baltimore lawyer selected by the board to succeed Glicker as interim president and CEO, said he was committed to balancing next year's budget.
"We have to increase our revenues and reduce our expenses," Richlin said. "And we need to demonstrate to the community that we can manage ourselves on an ongoing balanced-budget basis."
Asked the reaction of musicians to the news, Jane Marvine, head of the BSO players committee, said: "It's a board decision. We are hoping it will instill donor confidence in the organization. Clearly, we need to increase fundraising, and the hope is [that] this will help."
English said preliminary contacts have been made with the Internal Revenue Service and with state officials who oversee nonprofit endowments, and that the plan is not expected to run into legal obstacles.
Nonprofit endowments typically are considered restricted, with only a modest annual withdrawal applied to the annual operating budget.
"That draw normally hovers between 4.5 and 6 percent," Fogel said.
In effect, the BSO is taking a one-time draw of nearly 30 percent but, at the same time, is acting to protect the remainder of the endowment by placing it in the new, independent trust.
The BSO's annual draw from the remaining endowment will not exceed 6 percent under the terms of the trust. Endowments typically earn about 10 percent annually on investments, Fogel said.
"A significant percentage of orchestras, of many different budget sizes, have their endowments in a separate foundation or other organization," Fogel said.
It is not unheard of for orchestras to address deficits with endowment money. The Cleveland Orchestra, for example, has drawn extra from its endowment fund at least twice since 1994 to retire debt, most recently a $5.9 million deficit for fiscal year 2004. (That orchestra's endowment is now about $120 million.)
"The key question is donor intent and whether there were expectations placed on those donations at the time of the donation," said Trent Stamp, executive director of Charity Navigator, a New Jersey watchdog organization that rates large nonprofits.
In the BSO's situation, "it's really hard to imagine there are any donors out there that said, 'I'd like to give a gift to you and hope that down the road you'll use it to ease bad debt,'" Stamp said. Even so, he added, "it may be legitimate."
Some contributions to the endowment carried restrictions that applied to any earnings as well as the principal, English said. But the $27.5 million being transferred to the control of the board of directors has been identified as unrestricted investment earnings.
"We have come to the end of the investment period," English said.
Some BSO donors reached yesterday expressed support for the plan.
"This might not be the smartest thing to do, but it may be an opportunity for them to have a fresh start," said Margaret Counselman. She is in the symphony's "Maestro's Circle" whose members typically donate $15,000 or more. "If they do this now and they have good management practices, maybe they will stay out of debt in the future."
Counselman said the board's decision would not deter her from giving to the symphony in the future.
"I would be less inclined to donate on a regular basis if every year the debt got bigger," she said. "You don't throw money at a sinking ship. If they're afloat, they may have the opportunity to bring in new donors."
Eda Rubin, who, with her husband, Nathan, is a member of the "Century Club" whose members give the BSO $100,000 or more, said: "If the symphony needs to dip into the endowment fund, that's all right with us. It's a difficult time for arts organizations of any kind."
The BSO board has also voted to transfer the orchestra's real estate assets, Meyerhoff Symphony Hall and a parking garage on Cathedral Street, into the new independent trust.