Matthew Schuerman
08/01/2005
Joyce Veterane dialed her husband’s cell phone and caught him as he was rushing through an airport on the way to a business meeting. “My first reaction was, ‘What the heck is going on?’ ” says David Veterane, a founding partner of an investment firm, of that morning in February 2003. His wife, at home in Seattle, had just read the news that the nonprofit known as A Contemporary Theatre (ACT), which the couple had been supporting for 30 years, had debts of $2.7 million, only $3,000 in its checking account and needed to raise $1.5 million immediately or face bankruptcy. Joyce also called ACT’s managing director, Susan Trapnell, and learned that the theater had repeatedly racked up deficits, year after year, but usually found angel donors to bail it out at the last minute. The Veteranes decided the only right thing to do was write it a check for $10,000.
Philanthropists—and their friends—in cities all over the
U.S. are receiving similar panicked phone calls from their charities. A number
of cultural institutions have neared or actually declared bankruptcy in recent
years, only to be rescued at the last minute. Sometimes one individual or family
takes on the role of knight-errant, as Jack Taylor, the founder of Enterprise
Rent-A-Car, and his two grown children did when they pledged $40 million as a
challenge grant to save the St. Louis Symphony Orchestra five years ago. More
often the trustees reach into their own pockets and cut a wide fund-raising
swath through other existing benefactors and the community at large. ACT managed
to collect its $1.5 million from a variety of sources. Board members alone gave
$600,000. As the saying goes, the number one reason that people give money is
because someone asks.Crisis situations may offer donors an opportunity to feel particularly generous, but those versed in the basics of money management might well ask, as David Veterane did, what the heck is going on?
The problems many nonprofit institutions now face began, as they did with ACT, well before the economy foundered in 2001. Indeed, the easy money that flowed into nonprofits in the late 1990s cast a strange curse over the sector, tempting organizations to expand beyond their means. Particularly in the arts, many institutions discovered that they could afford to become larger, more sophisticated and more expensive to run, so they did. At the same time, because corporate supporters and audiences are increasingly national, small humble institutions that once were happy being small and humble suddenly were not. “It is hard to be just a neighborhood or regional institution now,” says Clara Miller, the president of the Nonprofit Finance Fund. “To some extent they have to create themselves as national destinations. Audiences are not as local.” These larger infrastructures and more extravagant programs naturally cost more to maintain, and a combination of roller-coaster economic conditions and increased competition have complicated their financial prospects.
The Veteranes had observed, in the years before the near-bankruptcy, that ACT seemed to be playing out of its league. A new artistic director, Gordon Edelstein, arrived in 1998 and began putting on excellent, but obviously expensive, shows. “It was as if he had a champagne diet on a beer budget,” David says. Still, he was happy to support the theater with a $10,000 annual corporate donation and several thousand dollars more in personal contributions, saying, “I guess the artistic talent available through ACT was worth the risk.”
For ACT and other nonprofits in similar straits, however, the most generous gift of all might be a dose of tough love. Because a production like the type staged by ACT costs about twice as much as it raises in ticket sales, a theater is a losing venture unless its fund-raising accelerates along with its budget. When Sheena Aebig joined the ACT board in July 2002, deficits had become such a way of life that trustees paid little mind to them. “There had been talk that the theater had been in financial trouble for a number of years, and I think there was this expectation that it would get resolved once again by year end, like it had before,” she says. “I think it was partially that the staff would deliver news that was sugarcoated. They would say, ‘Well, we’re a little thin, but we just got a big donation.’ ”
Recruiting Believers
Aebig happens to be a bankruptcy lawyer, so she had some idea about what it takes to get backers to believe in a failing venture. It was not enough to rattle a tin cup—that had been done before, too many times, and it was exactly that sort of stopgap fund-raising that had led to ACT’s serial deficits in the past. Aebig began to accompany the theater’s new president, Kate Janeway, to meetings with potential donors, explaining to them that a new team with a fiscally conservative approach was on board.
Indeed,
trustees promised they would keep donations in a trust and not touch the money
until they were certain they could afford the new season. Donors were shown the
season’s lineup—solid, no-frills repertory fare that would also sell tickets—and
the budget, which promised a $100,000 surplus by the end of the year. “We were
completely transparent with everybody,” Aebig says.
| TOP VIEW Cultural institutions around the country, hit hard in the last boom-and-bust cycle, are actively searching for philanthropic saviors. In most cases, a nonprofit on the brink of disaster needs a strategic makeover along with the bailout. |
“The big push, when I interview and recruit for the board, is, ‘You have to work here if you want to be on the board, but you have to work so it’s fun,’ ” says Siegler, a managing partner at Capital Run, a boutique investment bank in Seattle. “I think that most people involved in the theater in the old days probably knew each other anyway. They grew up with each other. It was a kind of club. Now it’s all about bringing new people in.”
ACT’s experience is not unusual. Chances are, unless fraud or embezzlement is involved, any financial misstep of this magnitude points to the board. Perhaps they did not demand quarterly financial statements on paper, or perhaps they did not understand their responsibilities to raise money. Unpaid board members are often dozing at the helm when a nonprofit founders on financial shoals.
Charities are commonly vexed by finding board members with just the right mix of qualities: ample time to devote to the board; a passion strong enough for the institution’s mission to make one a good ambassador and willing donor; and a business sense shrewd enough to look out for the institution’s long-term interests. ACT does not consider itself a turnaround story yet, but it has overcome its biggest obstacle—denial—and brought most of its donors along.
Conditional Angel
The Taylor family’s rescue of the St. Louis Symphony Orchestra has
become almost legendary, but it was not
without demands that the organization get its financial house in order. For
three decades the board had dipped into what little endowment the orchestra had
in order to balance the budget. Finally, five years ago, an outside consultant,
Henry Fogel, told the board it had to change its ways. So trustees went out
looking for a “transformational gift” to establish an endowment large enough
that its proceeds could sufficiently supplement annual giving and ticket sales.The Taylors came through with a grant that would have to be matched with other contributions. They had not had any particularly strong ties to the symphony—they were not even season ticket holders. But Virginia Weldon, the orchestra’s chair at the time, made the pitch to Jack’s son, Andy, whom she knew from having served together on a corporate board, and over the following months the idea germinated and finally flowered.
“When we jumped in, we had no idea
of the magnitude of the problem,” says JoAnn Taylor Kindle, Jack’s daughter and
the president of the Enterprise Rent-A-Car Foundation. “The problem had dragged
on for 30 years. Nobody was coming to grips with what was happening.”
Jack
Taylor had given to charities, but never such a large amount. The request came
at the time in his life—he was 78—when he was looking for the right beneficiary.
“We have strong ties to the community,” Kindle says. “We were all born and
raised here. Dad was looking forward to doing something for the community.”
The fact that Randy Adams, a former banker, had taken over as orchestra
president gave the Taylors a great deal of confidence that their money would be
wisely spent. In addition, they insisted on certain structural changes. Their
gift would be put into a trust that would be managed by a board separate from
the orchestra’s and that would be shielded against invasion of principal. Kindle
now sits on the orchestra’s executive committee, and a business manager from
Enterprise sits on the orchestra’s finance committee.
There is a certain
cyclical nature to the panic mode that has hit so many cultural nonprofits. If
Adrian Ellis, managing principal of AEA Consulting and an advisor to numerous
cultural entities, is right, nonprofits will soon begin expanding en masse
again, in tandem with the economy. “Cultural organizations see the upturn, they
begin planning their expansion, then the market falls away from them,” he says.
“They don’t respond terribly quickly to the market.”
This is a situation,
however, that puts benefactors in the enviable position of being able to learn
from past mistakes the next time a favorite cultural institution gets the urge
to add a new wing or renovate its hall. As a philanthropist, you will have to
step in at some point, preferably at the front end, when your money has the
chance of fueling a stronger-than-ever endowment and greater reserves, rather
than just paying off the debts.
From Your Side of the Table
Three Questions for Your Favorite Nonprofit
1. Does the board have a plan to hold donor money in an independently
managed trust?
2. If the organization has been dipping into its
endowment, is there a plan to increase ticket or subscription revenues to
finance future costs?
3. If an expansion project is underway, does it rely
on projected investment returns from the endowment, or is it contingent on
a new fund-raising drive?
Illustration by Jim Frazier.
Matthew Schuerman, a Brooklyn resident, writes on philanthropy and teaches at
New York University. ms@post.harvard.edu