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Attendance at the TCG Fall Forum on Governance is comprised of primarily executive directors and board members, with a sprinkling of representation from artists and staff members from the nonprofit theater world. So, after a day of terrific conversations, it was with great pleasure that I gathered a handful of them together for a panel discussion: “So You Have a Deficit, Now What?” What followed was a refreshingly frank discussion punctuated with practical lessons applicable to the work of any nonprofit administrator:
We began with a few general concepts:
- Talk of deficits demands a consideration of assets, but some valuable assets don’t appear on a balance sheet. Assets can also include intangibles such as: audiences, knowledge, staff members, a board of directors, openness to change, technological tools and savvy, diversity of background and age among your staff, board and stakeholders, civic and business partners, your “brand”, organizational self awareness, and, critically, when seeking to overcome deficits, knowing your impact.
- When considering “health” metrics at NFF, we think in terms of “months of cash” on an Unrestricted Liquid Net Assets (ULNA) basis. If you strip away all of the buildings, property, equipment, temporarily restricted, and permanently restricted items from your Net Assets, how much cash is left for operations? It can vary, but a rough starting point for an ideal is a 3 month cash/ULNA reserve.
- Deficits can be “financed” through a variety of means including: accounts payable, mortgage debt, drawing on reserves, foregone wages, employee furloughs, and over-extended lines of credit. It can be difficult to ascertain whether an organization is operating at a deficit, and structural operating deficits can be masked by a period of operating at sub-par capacity levels in order to keep expenses in-line. This will not be sustainable.
Managing Costs and Revenue
Tracy E. Long, General Manager of Adirondack Theatre Festival started off the panel by describing an initiative to overcome a $29,000 shortfall on a prior year’s performance, an 8% deficit on the annual budget. While the scale may seem relatively small, the deficit posed a significant challenge to their cash flow and was an ongoing concern. Long took on the deficit by addressing both revenue and costs:
- Increase ticket revenue on the margin by raising ticket prices by $3 each.
- Develop theater projects with partners to share costs but generate new and increased revenue.
- Respond to board member interest in hosting a “Brewfest” with board member spouses and another nonprofit to generate fundraising revenue.
- Decrease rehearsal periods for plays that could still be produced effectively with shorter advance time,.
- Change the design on printed materials to result in lower printing costs.
- Cut the full-time production manager and move to a “variable” staffing method – hiring as needed for theater tech and sharing the management tasks among the remaining staff.
Michael Gennaro, Executive Director, Trinity Repertory Company, began by making two important points:
- Even well managed companies are beginning to fail.
- Accumulated deficits and structural deficits are different and managing them requires different strategies.
Michael drew from his experience with the Pennsylvania Ballet as his first example. When he went there he found an accumulated deficit of $2 million on a $6 million operating budget. In that instance Michael suggests the first step is to analyze what makes up the debt you are inheriting and evaluate any creative strategies you can employ to get rid of it. At the Pennsylvania Ballet, the debt was almost completely financed through accounts payable, so Michael negotiated a “work-out” with the vendors to pay a percentage on the dollar of outstanding bills and thus retire the deficit.
In his current tenure as the Executive Director at Trinity Rep, he inherited a more challenging scenario: Three separate lines of credit were maxed out or frozen, and the building required an expensive update to meet fire code standards. Together, they amounted to more than $3 million dollars of accumulated deficit with the cost of deferred upgrades to the building generating a structural deficit. In this instance he took the following steps:
Sought a bond issue with a city guarantee to pay-off debt and re-structure payment schedule
Outcome: On the verge of success, they discovered a state law that prohibited bond funds being used for debt.
Sought to have a consortium of three banks share the underwriting risk and re-issue the debt
Outcome: Two of the three banks agreed, but the deal fell through.
Realized that they could offer an interest rate higher than current market rates to a group of investors
Outcome: A shared financing strategy interested six stakeholders, but six wasn’t enough.
Spoke with an attorney about the various strategies and came up with a new combined strategy
Outcome: Using a 501c3 Foundation that was created by the organization many years ago to manage a small endowment, purchase the property owned by Trinity Rep, using a bond instrument, and include the cost of fire code improvements. Then, the foundation can lease-back the property to Trinity Rep (this process is currently underway). Thus the debt is retired through the purchase of the property and not with bond funds.
Human Dynamics and the Power of Bootstrapping Confidence
Finally, Chris Widdess, Managing Director from Penumbra Theatre, shared her approach to an accumulated deficit of over $600,000 on an annual budget of $1.5 million. The financial issues were of great concern, but, when Chris came on she also identified the human dynamics as critical issues. She dealt with those first:
- Re-committed everyone to the mission: board and staff.
- Underscored that commitment with signs and notes throughout operations and performance spaces that linked activities to the mission
- Undertook a re-affirmation of the vision and role of the founding Artistic Director.
- Addressed the dynamics of the relationships between and among board and staff.
With these shifts in the organizational dynamics underway, Chris sat down with local funders and asked for a 4-year $1 million commitment to Penumbra in increments of $250,000 each year. She quickly discovered that funders had lost confidence in Penumbra and that she could not secure the grant commitments the organization needed. She then tried a different approach: “If we secure $1 million in new donor commitments in the next four years, will you match that amount?” That the foundation community was willing to do, and, within 3 years she had secured the new donors. When asked how she got new donors to be confident when foundations had not been she replied, “The foundation match!” She leveraged the contingent commitment of the foundations to build the confidence of the donors, who made the commitments that in turn secured the commitment from the foundations.
In the end, we found these themes tied the conversation together:
- Eliminate blame.
- Activate, articulate and organize around the mission
- Increase revenues on the margins.
- Work with partners to share costs and increase returns.
- Reduce costs where possible (without jeopardizing mission).
- Work as a team: board and staff. Your human capital is important – use it.
- Know your audience and communicate openly with them.
- Plan for solutions over time. Budget across multiple years. Plan for the future (not just digging out of the hole).
- Be Creative. Be Persistent. Be Bold.
|accumulated deficits, Arts, assets, deficits, structural deficits, theatre|