DATELINE: June 21, 2009, Chicago
Robin Pogrebin of the New York Times did a bang-up job this past week when she reported on the New York City Opera’s perilous financial condition. City Opera Tries to Hold Off the Ultimate Finale (June 17, 2009). Her in-depth article deserves to be read by everyone who is interested in nonprofit governance.
Quite the Mess. The New York City Opera is in a financial mess. Pogrebin reports that the company’s endowment has dropped from $57 million in 2003 to...
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$16 million today. During the past year, the company has successfully sought court approval to invade restricted accounts. On April 15 of this year, the New York Supreme Court granted the company relief, as requested in a petition for cy pres. The company was permitted to borrow up to $6.6 million to fund its cash-flow needs during its 2008-09 and 2009-10 fiscal years.
This was not the first time that New York City Opera sought relief from the courts. On October 28, 2008, a New York court granted the company relief, as requested in an earlier and separate petition for cy pres. The company was permitted to borrow $9.5 million from the Wallace Fund to pay down indebtedness carried forward from the financially disappointing 2007-2008 season and $8.02 million to meet immediate cash flow needs.
Court papers detail the long-run problems, stating:
Since the terrorist attacks on New York City on September 11, 2001, City Opera has struggled to respond to the various challenges of lowered attendance at cultural events and reduced donations, as well as long-term changes in tastes and ticket-buying preferences. During the same period, by contrast, City Opera has seen escalating fixed costs related to theater operations and labor, including union contracts -a not-insignificant burden considering that City Opera employs hundreds of people on a full-and part-time basis.
The Building Fund. Pogrebin's initial focus is on a fund that has been set aside for the renovation of the company’s Lincoln Center theatre. In July 2008, David H. Koch, a billionaire, gave the opera company a $100 million gift for renovation. The renovated theatre will be named for Koch. We have no trouble with that aspect of the gift.
The company now wants to withdraw $9 million from the renovation fund to reimburse the company for lost revenue that resulted from the renovation. We understand the logic behind the company's request. It apparently views the lost revenue as akin to construction period interest and taxes. Both normally are viewed as operating expenses, but the portion of interest and taxes incurred during construction is capitalized, which is essentially how the company wants now wants to treat the operating deficit. Koch told Pogrebin that use of the restricted funds is “out of the question that any of my money would go to City Opera for lost revenue.”
The statement is interesting because it assumes Koch has a say in the matter. We don’t know the specifics of the Koch's deed of gift. Koch may have retained the right to approve how the funds are used. Under the law of most states, Koch would not have standing to initiate or intervene in any court proceeding regarding his gift unless the deed expressly provided him with the right to participate. Once the gift is complete, the state’s attorney general and courts are normally the ones that determine whether donor-imposed restrictions have been violated and whether the charity can deviate from restrictions.
What puzzles us is why someone would give $100 million to a cultural institution with longstanding financial problems without allocating some of portion of the money to address chronic deficits or mandating structural changes. Although obviously generous, Koch strikes us as having done the City Opera a disservice with his gift unless there are facts that Pogrebin was unaware of.
The Board. We find the board’s role in all of this to be extremely troubling. Efforts are underway to expand the board. The hope is not to achieve better governance, but to increase the revenue generated by the board through fundraising efforts. Each board member is expected to raise at least $50,000 per year through his or her own contributions or through the solicitation of funds from friends and acquaintances. That will sound high to most people, but Pogrebin reports that it is “relatively low for an organization of City Opera’s size and ambitions.”
We think the board could accomplish far more by paying attention and exercising more oversight than it apparently has in the past. How does a board overseeing an organization justify a major capital project without first addressing what appear to be chronic operating deficits?
Much of the article focuses on the hiring of Gerald Mortier, a high-profile European opera director, as the New York City Opera’s general manager and artistic director. The 2007 decision to hire him appears to have originated with Susan L. Baker, chairwoman of the opera's board of trustees. The expectation was that he would help raise $60 million, but he apparently had limited fundraising experience and presumably would have had limited contacts in the United States. Moreover, his contract permitted him to remain in Paris until his term with the Paris National Opera ended in September 2009. From afar, Mortier demanded that the orchestra pit be expanded, which apparently is why City Opera had to vacate the theatre for a year. During that year, it continued to pay union employees.
We can only ask: Did the board seriously look at budgets? Wasn’t the board troubled that a person who would be instrumental in raising funds would be residing outside the country for a critical two-year period?
Mortimer added insult to injury, resigning in 2008 because he had expected a $60 million annual operating budget, but was asked to live with a $36 million one due to the absence of funds. We suspect that the funding shortfall had something to do with Mr. Mortier’s decision to continue to reside in Paris. The board should never have hired Mortier given his apparent inability to reside full time in New York City until 2009. That isn’t a criticism of Mortier. He struck the deal that served his interests and needs. It is a critcism of the board, who was willing to put the opera in a “kind of limbo,” as Pogrebin reports how others viewed the state of affairs.
Probably the most telling line of the article comes when Pogrebin refers to the “City Opera’s long history of ambitions outstripping capacity.” That is what fundraising boards often produce.
The Price. We don't know what the New York Attorney General is telling the New York City Opera to do, but the most recent court decision gives an inkling of the heavy demands that the New York Attorney General apparently is willing to extract as part of an agreement to alter the terms of a restricted gift--we don't fault the AG for his oversight. After all somebody has to keep an eye on this fiasco. But charities that are giving consideration to seeking relief in New York, should pay close attention to the following list:
(b) In addition to fulfilling its obligations under the October 28, 2008 Order, Petitioner shall restore to the Wallace Fund the net amounts borrowed from it pursuant to paragraph (a) as Petitioner has net financial resources that may be prudently used for that purpose consistent with the legal restrictions on the use of such resources.
(c) Petitioner shall submit a written annual report to the Attorney General of the State of New York(the "Attorney General")within six months after the close of each fiscal year of Petitioner ending on or after June 30, 2009 concerning the extent, if any, to which Petitioner, whether through contributions, accumulation of income, or capital appreciation, has during such fiscal year restored the value of the WaUace Fund as required by this Order and the Order of this Court dated October 28, 2008, such obligation to continue until such time as Petitioner can report that it has restored the amounts required by paragraph (b) and the October 28,2008 Order.
(d) Petitioner's senior management shall provide to the Board of Directors or the Executive Committee or to the Board of Directors a written report, not less often than once a month, concerning variances from the budget for the 2009-2010 fiscal year as such budget is in effect (and approved by the Board of Directors or the Executive Committee) from time to time.
(e) Petitioner's senior management shall provide to the Board of Dircctors or the Executive Committee of the Board of Directors. not less often than once every two weeks, an updated written cash-flow projection for the balance of the 2008-2009 fiscal year and for the 2009-2010 fiscal year.
(f) Petitioner for the balance of the 2008-2009 fiscal year and for the 2009-2010 fiscal year shall report periodically, but in no event less frequently than once a month, to an independent financial advisor concerning the strategic plan and financial plan that was previously developed in consultation with independent financial advisor Michael M. Kaiser, for the purpose of reviewing budget variances with the advisor, obtaining the advisor's assessment of the continued viability of such strategic plan and financial plan, and identifying alternative courses ofaction as warranted. The advisor retained for such purpose may continue to be Michael M. Kaiser or, alternatively, shall be another individual selected by Petitioner and approved by the Attorney General (such approval not to be unreasonably withheld).
(g) Petitioner's Board of Dircctors shall continue the on-going evaluation of the effectiveness of Petitioner's governance, financial and risk management, investment management policies practices, and systems of internal controls and, following consultation with the Attorney General, adopt appropriate enhancements thereto.
(h) Petitioner shall designate or retain a qualified individual to perform the roles and functions of chief financial officer.
(i) Petitioner for the balance ofthe 2008·2009 fiscal year and for the 2009-20I0 fiscal year shall report periodically, but not less often than once per calendar quarter,to the Attorney General concerning its compliance with the terms of this Order and its projections concerning its anticipated ability to restore amounts to the Wallace Fund in accordance with this Order and the Order of this Court dated October 28, 2008.
Best to do it right the first time and live within the charity's existing means. And in the getting it right department, anybody who is interested in establishing a restricted fund should read the Wallace Fund documents that are part of the file that the New York Attorney General provided us as part of our freedom of information request. We must admit that we haven't spend hour reviewing the documents, but it is quite apparent that somebody gave a lot of thought to expressing donor intent, historic dollar value, and changes in fund value.
| THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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