BSO considers innovative approach to cover deficit

Mortgage-like plan would yield $30 million in bonds

September 25, 2004|By Paul Adams and Tim Smith | Paul Adams and Tim Smith,SUN STAFF

With debts mounting and its future on the line, the Baltimore Symphony Orchestra has drafted an unusual proposal to take out the equivalent of a 30-year mortgage on its house in order to fund new programs that it hopes will boost revenue and finance a deficit that is expected to grow to $12 million by 2008.

The BSO's board has agreed in principle to sell Meyerhoff Symphony Hall to a newly created nonprofit subsidiary, which will finance the purchase by issuing as much as $30 million in tax-exempt bonds, under one scenario presented to directors. The orchestra would then lease the concert venue back from the subsidiary for an amount to be determined.

Proceeds from the sale would be used to cover the deficit, with the remainder likely going into an endowment that would help fund continuing operations, BSO officials said. The board's approval was contingent on the orchestra's players accepting a one-year contract with pay and benefit concessions that are expected to save the symphony $1.6 million annually. The players voted to accept the terms yesterday, with an unusual sweetener: Musicians won the right to eventually have control over hiring, a power that usually rests with an orchestra's musical director.

"What we've tried to do is construct a way of financing this deficit in the most creative manner that we can and that doesn't harm the institution," said Philip D. English, BSO board chairman.

The complex financial bailout comes at a time when the orchestra is about to launch its second home, the Music Center at Strathmore in Montgomery County, which is to open in February. It is expected to be a potential source of new revenue.

The bailout also comes as the BSO continues to rebuild after a tumultuous year that saw the departure of a handful of top administrators and several other key personnel. The staff turnover followed the appointment of James Glicker, a former marketing executive in the food and recording industry, as its president.

Glicker had no orchestral experience, but board members argued that his nontraditional background was just the elixir the BSO needs to reverse a slide in revenue that has bedeviled orchestras nationwide. In 2003 alone, the nation's roughly 1,200 orchestras - most of which are running deficits - added $37 million in debt to their already strained budgets as a slumping economy stemmed the flow of contributions from individuals, corporations and government grants.

Financial analysts and industry experts said they can't think of any other professional orchestras that have financed debt by selling a concert hall with tax-exempt financing underpinning the plan. Some give the BSO credit for trying the untried.

"I think I'm fairly safe in saying it's unusual and quite possibly an innovative approach," said Jack McAuliffe, chief operating officer for the American Symphony Orchestra League.

But numerous questions remain about how the deal will be structured, how much financial risk the board will take on and whether the arrangement will pass muster with the Internal Revenue Service, which has strict rules governing how nonprofits can spend tax-exempt funds.

T. Clifton Green, assistant professor of finance at Emory University in Atlanta, said the arrangement is similar to a homeowner taking out a second mortgage on a house to pay off other debts. The proposal doesn't raise any red flags, so long as the symphony can raise revenue and erase future deficits, he said.

Evaluating the plan

"If they think this is a temporary downturn, this seems like a reasonable way to weather the storm," he said. "But if this isn't just a storm and it just reflects the current condition of symphonies in Baltimore, all this is going to do is let them slowly die while they deplete their asset."

The problem that orchestras like the BSO face is that their costs are rising at a time when contributions and ticket sales are declining, said Arthur Brooks, an associate professor of public administration at Syracuse University and co-author of The Performing Arts in a New Era.

While the BSO may have found a creative, low-risk solution to its problems, at least for now, he said it won't work unless revenue picks up over the long run.

"I say, `Hurray! - a nonprofit being really innovative in the financial markets,'" he said. "Typically, arts nonprofits are very stodgy and non-innovative."

Using tax-exempt financing for construction projects or to fund programs is not uncommon, but placing even a portion of those proceeds into an endowment that would generate profits through stock market investments might raise eyebrows, two bond analysts said. The potential is that the investment returns could be diverted to repay the debt, which would carry a low interest rate because of its tax-exempt status.

Glicker said many of those questions will be answered later, and the structure of the deal could change.

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