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The Philadelphia Orchestra's Unfortunate Bankruptcy Filing

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The decision by the Philadelphia Orchestra Association to file for reorganization under Chapter 11 of the Bankruptcy Code may well turn out to be one of the most bone-headed business judgments ever made by a major American arts organization. It is already one of the most deplorable.

In a recent letter to the editor, the vice president for financial affairs of St. Joseph's University stated his view that the board of the Philadelphia Orchestra Association is "made up of some of the brightest minds in the business community." This does not reflect well either on the sagacity of the officials at St. Joseph's University or on the quality of what passes for bright minds in Philadelphia.

According to Richard B. Worley, Chairman of the Board of the Orchestra Association, the Chapter 11 filing was intended to accomplish five purposes: 1) Relief from the Orchestra Association's obligations to the musicians' pension fund; 2) Relief from the Orchestra Association's obligations to Peter Nero and the Philly Pops; 3) Renegotiation of the existing agreements with Kimmel Center, Inc. (owner of Verizon Hall, the orchestra's performance venue); 4) A new collective bargaining agreement with the orchestra's musicians; and 5) A plan that achieves the four previous goals so that donor support may be attracted to the wildly unachievable level of $160,000,000 or $214,000,000 (depending on which press report you read). The translation of this is really rather very simple: We have completely betrayed the public trust that was unwisely placed in us, and you now need to give us the chance to violate that trust once again.

The Philadelphia Orchestra is not insolvent and it is nowhere near insolvent. According to its IRS filing, it ended Fiscal 2009 with an endowment of over $129,000,000 (down from $143,580,000 the year before) and this sum is more than three times its liabilities as of the filing date of the Chapter 11 proceeding. To the extent that there is a genuine problem it is cash flow. A cash flow crunch, and a nasty desire to stick it to the musicians who make the music which is the alpha and omega of the orchestra's reason for being is what's motivating this bankruptcy filing. (The Orchestra Association's most recent audited financial statement is found here.)

The 700 pound gorilla in the room is the Orchestra Association's obligation to the musician's pension fund. This was an obligation it negotiated and now wishes to go back on. In common parlance (and at the risk of insulting Bryn Terfel) it wishes to welch on its debt. The orchestra argues "this is worse than it appears." And indeed it is, but not in the way the orchestra claims.

Management no longer wishes to have any part of the agreement it solemnly entered into. The pension obligation is roughly $3,000,000 per year, and if it withdraws from its obligation it is contractually committed to make a one-time $25,000,000 payment to the pension fund. The Orchestra Association argues on the one hand that by welching on this and other debts it can save $40,000,000 over five years. This is fascinating in that management's last audited financial statement estimated pension costs over the next five years at $16,340,000. It is little wonder that the musicians' union does not believe the Philadelphia Orchestra Association's numbers since they are simply made up.

It is known that the agreement between the Philadelphia Orchestra Association and the Philly Pops has expired, but the agreement between Peter Nero (long-time leader of the Philly Pops) and the orchestra has not. Nero brought an arbitration proceeding to compel the Orchestra Association to schedule and announce a 2011-2012 season. The orchestra lost that arbitration and it now seeks to win before the Bankruptcy Court what it lost in the arbitration. Whether the Bankruptcy Judge will allow it remains to be seen, but I would not bet the farm on the proposition.

It has been reported that the Orchestra Association claims that it owes the Kimmel Center just under a quarter of a million dollars; the Kimmel Center claims that the amount is actually over $1,200,000 but that it has forborne from demanding $650,000 of what it is owed. You would think that the brightest minds in the business community could agree on something as basic as "Just how much do we owe you?"

When all of this is fairly examined, a number of points stand out clearly:
  • In the Kimmel Center, the Orchestra has a landlord that is willing to negotiate and make compromises with an eye toward long-term stability. The Orchestra Association has refused to negotiate and seeks instead to have the Bankruptcy Court compel and enforce a new, more favorable lease agreement.
  • Efforts were made to resolve the dispute between Peter Nero and the Orchestra Association; those efforts failed and an arbitration proceeding was undertaken that the Orchestra Association lost. It now seeks to have a Bankruptcy Court grant a mulligan.
  • But the real stinker is the benefits obligation. The Orchestra Association's pension obligation did not materialize out of thin air. It was the result of negotiation between the association and the musicians' union. The Orchestra Association did not open its mail one morning to find a bill for something it never agreed to.

Worse, years ago the Orchestra Association went to the musicians and in effect said "Look, we have a cash crunch. Please allow us to issue an IOU to the pension fund instead of cutting a check." The union agreed and a series of memoranda of understanding were entered into, creating an unfunded pension liability. That accrued pension liability, which was $18,984,000 at the end of FY 2009, was $22,895,000 at the end of FY 2010 according to the Orchestra Association's audited statement. So if I am reading this right, the orchestra is in the hole to the pension fund to the tune of $22,895,000 as of the end of FY 2010 and, if it opts out of the agreement, it owes another $25,000,000 on top of that (instead of $3,000,000 or so per year going forward). It is this debt that the Orchestra Association wants the Bankruptcy Court to say may be skipped out on. In fact, it was the short-sighted, greedy decision by the Orchestra Association to try to avoid this debt that motivated the bankruptcy filing. The musicians bailed the Orchestra Association out by accepting $22,895,000 in IOUs instead of cash on the barrel-head and this is the thanks it gets. Sort of restores your faith in human gratitude, doesn't it Mr. Scrooge?

The lesson for any group covered by a pension plan when the non-sovereign employer (that is, an employer not possessed of the power to lay and collect taxes) says "We need to create an unfunded liability due to our cash situation" is "Absolutely not unless you bond the obligation." One assumes that the musicians' union will know for next time.

Of course, throughout all of this the orchestra members have done 100% of what they were contractually obligated to do: Play music to the best of their estimable, world-class abilities. The Orchestra Association had 100% of their effort and 100% of their skill, on time and in the manner required. The Orchestra Association responded to this by providing zero good faith and zero professional competence.

We are talking here about an Orchestra Association that in FY 2009 spent $84,000 on legal fees (plus $14,000 in fund raising-related legal fees) but which, in the ninety days before the Bankruptcy filing, paid Dilworth Paxson (its Bankruptcy Counsel) $319,000 in fees...and its lead bankruptcy counsel is billing out at $750 per hour (and, of course, partners in major law firms never work alone. You can be 100% certain that at a minimum the $750 per hour partner has at least one $350 per hour associate billing right along with him). This does not suggest that the Orchestra Association was laboring mightily right up to the last minute to avoid reorganization; it suggests instead that it was engaged in an elaborate charade to talk compromise while planning a Bankruptcy filing. This sort of mendacious behavior is commonly deemed an exercise in "poisoning the well," and if the musicians' union takes the position that the Orchestra Association cannot be trusted henceforth to make good on its promises, it has ample reason for the belief.

The Philadelphia Orchestra has, it is noted, been playing to audiences of roughly 65% of capacity. In the last year for which data are available it has generated $13,878,000 in performance revenue while at the same time racking up $32,911,000 in performance expenses. But no American orchestra relies on ticket sales for a majority if its budget, so screams of "our ticket revenue does not meet our costs" is a bogus argument. When you add the "public support" of $9,558,000 and the "campaign contributions" or $10,170,000 and subtract the administrative expenses of $9,147,000 (a number that I suspect has more fudge than Brach's) you end up somewhere around an $8,863,000 operating loss in the most recent fiscal year. Unpleasant to be sure, but hardly catastrophic for an organization with a $129,000,000 endowment. One assumes that somewhere in the performance expenses account is taken of the $1,161,000 paid to Charles Dutoit's management company and the $693,000 paid to Christoph Eschenbach in FY 2009. To say nothing of the $447,953 paid to the former President and CEO in FY2009, the $198,432 paid to the Vice President of Marketing and Patron Services in FY2009 and the $221,893 paid to the Vice President of Development and Board Relations in FY2009.

The Orchestra Association argues that these numbers are hardly excessive, especially in view of the fact that in FY2009 the highest paid member of the orchestra (a trumpet player) received $296,153, which is doubtless true. The difference is that the orchestra players are well paid because they are excellent practitioners of their respective crafts, all of whom are paid market rates and most if not all of who could earn as much or more elsewhere. Paying $447,953 to a President and CEO who ran one of the most storied orchestras in America into the ground is a decidedly lesser bargain.

One would hope that the Bankruptcy Court would, at a minimum, refuse to approve any plan that calls for any member of the Orchestra Association's Executive Committee to remain in position and that the entire host of vice presidents be sacked for their abject failures as well. These gentlemen and ladies who have betrayed a public trust and who have sought to hide their failures behind a smoke-screen of "it is all the fault of these over-paid, greedy musicians" deserve forced retirement instanter. A decade of bad decisions ought to have consequences. The Orchestra Association is about to embark on a massive fund-raising campaign styled "Listen With Your Heart." One hopes that the Bankruptcy Judge will instead adjudicate with his head and clean house without delay.