This is a book for anyone interested not just in the economic state of the symphony orchestra but in the overall financial health of the arts in the United States.
The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges by Robert J. Flanagan. Yale University Press, 240 pages, $50.
By Jonathan Blumhofer.
The classical music world is a pretty precarious place these days. In Boston this past January 1st, the city’s adventurous Opera Boston suddenly shut down, citing massive debt. Last year in New York, the City Opera, short on funds and apparently heading into creative doldrums, embarked upon a new, homeless phase, with a drastically reduced season and shrunken core of administrators and musicians.
Opera hasn’t been the only genre to suffer: in 2010 and 2011, the venerable Philadelphia Orchestra filed for bankruptcy—a first among major ensembles in this country—and the Detroit Symphony experienced a lengthy work stoppage due to financial issues. And then there are the more vulnerable, small-market performing arts organizations like the Honolulu Symphony and the Columbus (OH) Symphony Orchestra, both of which have shut down since 2008.
So, why is the financial health of so many American classical music institutions unstable? Robert J. Flanagan, professor emeritus at the Stanford School of Business, takes on this question, particularly as it pertains to the rarified world of the symphony orchestra, in his aptly titled book, The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges. The answer, as Mr. Flanagan puts it in his closing chapter, is complex: there is no “silver bullet” to solve the problem. However, he does a fine job in this relatively short tome (186 pages, not counting appendixes and index) of explaining how the problem developed in the first place, and he sets out some good guidelines for those looking to understand and grapple with its ramifications.
If his prose is a bit dry, the urgency with which Mr. Flanagan writes is not: this is a book for anyone interested not just in the economic state of the symphony orchestra but in the overall financial health of the arts in the United States; it is particularly appropriate for those inclined to action in this field.
Early on, Mr. Flanagan describes the root of the problem as an economic ailment he diagnoses as “cost disease.” Simply put, there are two types of industries, high growth “goods producing” (such as manufacturing and mining industries) and low growth “service sector” (which includes the performing arts). As Mr. Flanagan describes it,
If both pay and output per employee in the goods-producing sector increase at 3 percent each year, labor costs per unit remain constant. Higher pay is exactly offset by the additional units produced, and there is no labor cost pressure on prices. But if pay increases at 3 percent per year in an industry with no productivity growth, labor costs per unit of output will increase at 3 percent per year, creating pressure to cover the increased costs with higher prices.
Thus, in the performing arts, where the performance (“output”) and the performer (“labor input”) are one and the same, low productivity growth is inherent to the nature of the industry. To cover annual cost increases, organizations might raise ticket prices—which could have the adverse effect of turning away potential audiences—or they may turn to other means (such as fundraising) to cover their deficits. The subsequent need for nonperformance income, though, incurs costs of its own, and this often compounds an institution’s financial problems rather than alleviates them.
Following a discussion on the difference between cost disease and business cycles (in short, the latter are temporary, while the former represents a structural issue within an organization’s budget), Mr. Flanagan turns to orchestral finances, breaking down expenses and, to provide some context, comparing the situation of the average American orchestra to that of its counterpart in Australia. As of 2005, he writes, the League of American Orchestras determined that, on average, only 37% of a given American orchestra’s income is derived from performance revenue. The other 63% comes from a combination of private support, investments, and government aid.
Dismal as that latter figure looks, it appears positively robust when compared with the state of affairs in Australian orchestras: there only 28% of income is gained from performance revenue. Interestingly, though “artistic” costs account for nearly half of American orchestras expenses, the figure rises to nearly three-quarters of the expenses encountered by Australian ensembles. For both, the other costs are a combination of production, marketing, administrative, fundraising, and “other” activities.
It follows, then, that since audiences support orchestras, the most logical way for orchestras to grow income is to develop new audiences. The problem here, as Mr. Flanagan demonstrates, is the fact that total classical music concert attendance diminished dramatically over the closing decades of the 20th century and into the first decade of the 21st. The reasons for audience decline are several, including outside economic influences and changing musical tastes, but the immediate result has been a decline in the overall financial health of performing arts institutions nationwide.
Interestingly, over these same years orchestras have generally increased both the number of concerts they performed per season as well as the types of concerts they presented (pops concerts, family concerts, etc.). Not surprisingly, the cost of mounting additional concerts is, as Mr. Flanagan writes, “far from zero,” which, when combined with smaller audiences, often translates into increased performance deficits.
Additionally, in some cities the competition between different performing arts groups for the attention (and financial support) of a limited audience can further effect the ability of an ensemble to thrive; one gets the feeling that such conditions might have in some way played into the recent demise of Opera Boston. Perhaps the most sobering statement, though, is the one with which Mr. Flanagan closes this chapter: even if orchestras can fill every seat in the hall, he writes, most still won’t be able to cover their performance deficits. Thus, while building audiences is an integral part to solving the financial crisis, it is not the only one; other solutions must be considered in combination with it.
In the next four chapters, Mr. Flanagan breaks down orchestra budgets, turning in an in-depth study of, respectively, artistic and non-artistic costs, government support of orchestras, private support of orchestras, and, finally, orchestra endowments and their governance. In his discussion of the first subject, Mr. Flanagan includes a thorough discussion of musicians unions and the collective bargaining process with orchestra management that determines the pay and working environment of orchestra musicians.
On the surface, orchestral musicians are very highly paid for a workweek that, on average, requires relatively little from them (about 20 hours of “services”—rehearsals and performances): in 2003 the average weekly earnings of orchestral musicians were nearly $1,600. However, as Mr. Flanagan rightly points out, this calculation does not take into account the fact that these musicians are, by and large, the best in the world at what they do, and that their non-service time is largely occupied with practicing their instrument to maintain the high level of their abilities (which, itself, might require well over 40 hours a week).
Still, the fact remains that, since the 1980s, the wages of orchestral musicians has increased at a faster pace than workers in other industries. When, in times of economic distress such as we have seen in the last decade, other industries might cut expenses by furloughing employees or curtailing their hours, orchestras don’t have that luxury: their collective bargaining agreements preclude such steps. Indeed, Mr. Flanagan argues that many of the orchestral bankruptcies of the last 20 years demonstrate the folly of “a wage policy that ignores measures of an organization’s economic strength,” instead relying on private donations to cover musicians’ compensation. While not begrudging orchestral musicians their salaries, he points out that “without some moderation in the growth of artistic and other expenses, these consequences can only be avoided by attracting ever-increasing flows of non-performance income.”
The following chapters then explore avenues of non-performance income, starting with government support for the arts. While the lack of federal support for the arts by the United States government has nearly always been appalling, Mr. Flanagan concedes that there are clear political reasons for this sorry state of affairs and suggests that Federal tax expenditures offer a strong incentive to donate, particularly for those in higher tax brackets.
As for private philanthropy, Mr. Flanagan proposes that, in principle, it offers perhaps the most promising way for orchestras to cope with growing budget imbalances, if only because such giving has increased significantly over the past several decades. However, there’s no guarantee that this trend will continue, and Mr. Flanagan, in his concluding statements, admits that many of the factors that influence private philanthropy are beyond the control of an orchestra: the changing real incomes of a given community, competition between competing nonprofit organizations, as well as doubts about the viability of orchestras themselves.
Orchestral endowments, the final area of finance covered in the book, can also prove a mixed bag: endowment growth “reflects the interplay of three factors: contributions of new endowment funds, the rate of return on endowment investments, and the rate of payout from endowment funds.” However, the availability of endowment funds varies widely, orchestra to orchestra, for a number of reasons, which may go back decades into an orchestra’s financial history. Even for the best-managed endowments, Mr. Flanagan writes, there will still be financial challenges: in order to close performance deficits, the annual return on an endowment must grow commensurately with that orchestra’s deficit, which typically requires perpetually larger endowments.
So how does Mr. Flanagan suggest orchestras cope with these financial difficulties? First, he writes, they need to honestly diagnose the problem. This requires reviewing concert attendance, the number of concerts offered, musicians’ salaries, and, finally, considering whether or not the orchestra’s sources of nonperformance income will, in fact, cover its structural deficits. Once these issues have been addressed, the next step is for the organization to recognize that none of the three “broad strategies” for resolving deficits—performance revenues, slowing the growth of expenses, and increasing nonperformance income—will likely, by themselves, erase them. For an orchestra to nurse itself back to financial health and to remain in that state, Mr. Flanagan writes, a combination of creativity, wisdom, and good judgment is required in each of these three areas by both musicians and management.
All of this is good advice, especially for individuals working to stabilize the orchestral economic environment. To this effect, one of the principle themes Mr. Flanagan returns to in this book is that of developing audiences.
At a couple of points, he seems to suggests that, perhaps, the audience for classical music in American is tapped out: while the art form probably won’t disappear entirely, he claims, it will likely remain a very small slice of the cultural pie. Maybe he’s right, but I tend to be a bit more optimistic about this subject, especially in light of the vibrancy of orchestral life as witnessed in several major cities, including Boston, Los Angeles, San Francisco, Chicago, and, more recently, New York. What the major orchestras in all these cities have in common is that they have tapped into their respective communities and engaged with them in meaningful ways, from offering free neighborhood concerts to spearheading innovative educational initiatives. This is a subject that could be expanded upon in Mr. Flanagan’s text, though perhaps it falls somewhat outside his purview, being more anthropological in nature than economical.
While it’s true that bigger orchestras with large, well-managed endowments and steady streams of nonperformance income have advantages over small-market ensembles struggling to stay afloat, the principle of making an orchestra relevant to its community applies across financial lines, and therein, I would suggest, lies the future of orchestras in this country.
Boston is a unique city with an abundance of excellent musical organizations, running the gamut from period ensembles (Boston Baroque, Handel and Haydn Society) to symphony orchestras (Boston Symphony, Boston Philharmonic) to contemporary groups (Boston Modern Orchestra Project) and many more in between. That the region can support so many classical music organizations is a testimony to the skill of its performing arts administrators, the generosity of their patrons, and the excellence of the many musicians who comprise these groups. Still, none are immune to financial peril (as we saw earlier this year with Opera Boston), and this reality requires continued creativity in managing finances and expenditures.