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Minnesota Orchestra Financial Review, June 10 2013

Minnesota Orchestra Financial Review, June 10 2013

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Minnesota Orchestra Financial Review, June 10 2013
Minnesota Orchestra Financial Review, June 10 2013

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Categories:Business/Law
Published by: Minnesota Public Radio on Sep 04, 2013
Copyright:Attribution Non-commercial

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09/05/2013

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CONFIDENTIAL
Financial Analysis of theMinnesota Orchestra
June 10, 2013
 
2
TABLE OF CONTENTS
PageExecutive Summary
3
Introduction
5
 T
he Orchestra’s Financial Situation
 
 T
he Orchestra’s Strategic Business Plan
8
 Conclusion
15
AppendicesI.
 
Scope of the Financial AnalysisII.
 
Background Information About AKA|Strategy
 
3
EXECUTIVE SUMMARY
Orchestras nation-wide are confronted with serious, endemic financial challenges that aregrowing in scope and impact. The Minnesota Orchestra has had a history of growingannual operating budget deficits, totaling over $22 million in the three year period of 
FY2010 through FY2012, an amount equal to two thirds of the Orchestra’s FY2012
operating budget of $31.5 million.The reason for the larger and larger operating deficitsis straightforward:
 
The Orchestra negotiated a new contract with its musicians in FY2007 that
significantly increased its fixed operating expenses (“hard costs”) in a budget thatwas increasingly dependent upon contributed revenue (“soft funding”), making it
 particularly vulnerable to adverse financial circumstances.
 
The Great Recession hit the Orchestra hard: in FY2009 the market value of itsendowment decreased by about 30% and its contributed revenue fell by 17% fromthe pre-recession annual average.
 
The Orchestra reduced administrative and overhead expenses in the six-year of FY2008 through FY2013 by about $1.5 million in an effort to reduce the deficits.
 
Contributions were not sufficient to close a growing gap between operatingrevenue and expenses. These growing deficits were increasingly funded throughlarger and larger annual exceptional draws from the endowment.
 
The exceptional draws, in turn, reduced the market value of the endowment,already battered by the recession, which resulted in lower endowment draws over time and placed ever growing pressure on the operating budget.Alarmed by the steady worsening of its financial circumstances, the Orchestra undertook a thorough review of its overall financial architecture over a two year period, culminatingin the development of a Strategic Business Plan approved by the Board on November 2,2011. The Plan seeks to achieve a sound balance between artistic quality and financialsustainability and puts
the Orchestra on a “break 
-
even” basis by balancing the operating
 budget; limiting spending from its endowment to 5% of market value on a trailing threeyear average; and adjusting estimated fundraising and ticket sales to realisticallysustainable levels.The Strategic Business Plan calls for the generation of about $2.1 million of annualincremental net revenue; staff and overhead reductions of about $1.5 million annually;and a sizeable reduction in total musicians
expense
 – 
almost half 
of the Orchestra’s
operating expenses
 – 
through an unspecified set of possible changes.The overall logic of the Strategic Business Plan is sound, as are the underlying financialassumptions in it. T
he Orchestra’s
independently audited financial statements for the past half decade are unqualified.

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