Seeing Red

Theatre Facts 2002 is the first report to assess the financial impact of the events of Sept. 11, 2001, as well as the impact of the economic downturn that was already underway at the time of the attacks. Technically speaking, the recession of 2001 lasted only from March to November of that year (according to the nonpartisan National Bureau of Economic Research). Nonetheless, the U.S. economy’s overall rate of growth has yet to reach the standard benchmark for a bona fide economic recovery, and the news about employment is dour—approximately 50,000 jobs continue to disappear each month. Thanks to ongoing fallout from the collapse of the dot-com bubble, the disappearance of enormous amounts of paper wealth in the form of stock-market declines, and the all-too-real evaporation of an estimated 2.7 million jobs since the recession began, the U.S. economy has yet to pull itself out of its extended funk.

No wonder then that the tidings about theatre finances are less than heartening. The most distressing piece of news is that for the first time, more than half of the Universe Trend Theatres reported a negative change in unrestricted net assets (CUNA)— in laymen’s terms, a deficit. The number of theatres operating in the red in 2002 rose 24 percent from the previous year.

It’s worth taking a minute to understand CUNA—one of those acronyms that economists love but that leave the rest of us scratching our heads—as it is the single most useful measure of a theatre’s bottom-line financial health over a one-year period. In the most basic sense, CUNA tells you whether a theatre made or lost money. A theatre that ends the year with a surplus is said to have a positive CUNA, whereas a negative CUNA signifies an operating deficit. However, CUNA does not take into account accumulated surpluses or deficits.

Say the word “deficit” and a red flag inevitably goes up. Theatrical production is an inherently risky endeavor, and, like any business, a theatre may have good years and bad years from a fiscal point of view. Theatres have a variety of strategies for managing deficits, as well as mechanisms on which they can depend to cover times when the budget comes up short. For example, some theatres have built cash reserve funds, setting aside monies during surplus years so as to have the means to cover deficits when they occur in other years. Unfortunately, theatres reported net capital losses in 2002 as endowments and reserve funds shrank along with the financial markets. A particularly alarming conclusion in Theatre Facts is that among the Profiled Theatres, the overall working capital ratio, a comparison of cash on hand vs. total expenses, was -11 percent, indicating that these theatres are borrowing funds to meet daily operating needs.

If there is any good news about the deficits, it is that, although 54 percent of the Universe Trend Theatres showed red ink in 2002, the size of those deficits remained relatively small. The percentage of theatres reporting a negative CUNA that exceeded 20 percent of their budget has not increased significantly over time, remaining in the neighborhood of 1 percent to 5 percent of the surveyed theatres.

And yet theatres continued to grow in 2002. Among the Universe Trend Theatres, growth in total spending outpaced inflation by 38.9 percent. Income also rose over the same period, but at a slightly slower rate: 36.3 percent above inflation. Some of the increase in spending is due to rising costs, always a factor in a labor-intensive, specialized industry in which efficiencies of scale are seldom available. But it also indicates growth: Theatres spend more because they increase the amount of programming or the scope of their work. “Our costs have gone up,” says Chip Walton, artistic director of the Curious Theatre Company in Denver. “But we have made conscious choices to raise our costs.”

The big question is whether growth or shrinkage is on the horizon. With spending rising faster than income in a shaky economy, something’s got to give. There is evidence that widespread shrinkage—a decline in the rate of growth, as well as actual cutbacks—may be underway. Managing director Michael Maso of Boston’s Huntington Theatre Company says that companies across the U.S. are tightening their belts. “This is the first serious year or year-and-a-half of budget cutting I’ve seen in 30 years in institutional theatres,” he says.

Milwaukee Repertory Theater managing director Tim Shields agrees. “It’s clear from looking at Theatre Facts that for many theatres in many communities, this is a time of pain and watchful waiting to see when the economy is going to turn. Our job as theatre managers is to maintain what we can maintain during this period, and try to be ready for when conditions brighten.”

Given the threat of future terrorism, the war in Iraq and the sluggish recovery, theatre leaders are wondering when the other shoe will drop—or has it dropped already? Dealing with uncertainty is the biggest challenge, says managing director Kate Warner of the Theatrical Outfit in Atlanta. “When is the economy going to hit bottom? How bad is it going to get, and have we gotten there yet? Will it get better from here?”

Still, faced with what TCG executive director Ben Cameron described at the June 2003 TCG National Conference as “economic austerity unlike any I have seen in my 25 years in the field,” theatre leaders are drawing on a reservoir of creativity and resilience, a we-can-do-it mentality. Richard Stein, managing director of California’s Laguna Playhouse, laments what he calls “hand-wringing” in the field: “We less often read about the kind of ingenuity being used to overcome these obstacles. We can become so insular as to think that we’re the only ones going through this. I don’t think it’s limited to theatre; I don’t think it’s limited to arts; I don’t think it’s limited to not-for-profit. I think that the most successful organizations are those that continually reinvent themselves.”

The Fundraising Front

One of the brightest spots in Theatre Facts 2002 is that theatres saw remarkable increases in contributed income. The 78 Trend Theatres counted an above-inflation rise of 52 percent in overall contributed income between 1998 and 2002. That’s an amazing figure in itself, but it’s even more revealing to take a closer look at exactly where those funds are coming from. In a nutshell: The shift is toward individual donors.

Here’s a category-by-category perspective. Federal support was down slightly in 2002, having fallen more than 10 percent since 1998 in inflation-adjusted dollars. Local government support took a 44.1-percent dive in 2002, after rising in 2001. Corporate giving reached a five-year high in 2002; its growth has outpaced inflation by 21.3 percent over the period. However, the average number of corporate donors per theatre declined 40 percent, from 87 to 52. In other words, fewer corporations made larger gifts in 2002 than in 1998. Foundation giving declined slightly from 2001, but is still up 47.1 percent since 1998.

One seemingly auspicious figure—a rise of 19.1 percent in state funding—will almost certainly turn out to have been a one-year statistical bump. Although the report concludes that state art commissions continued to recognize the cultural and economic muscle of arts organizations with increased funding, in the months since the period covered by Theatre Facts 2002, axes have fallen on arts-commission budgets in state after state. To name but two, California has slashed its arts-council budget by a chilling 90 percent in 2003, and Chip Walton reports that the Colorado governor used a line-item veto to cancel all arts-commission funding for institutions in Denver County. “We had a $30,000-plus grant in the application process that this put the kibosh on,” he says. “It’s not a good time in Colorado.”

Individual Donors Step Up to the Plate

That leaves one major category of contributed income, but it’s a big one. “Individuals are the key to successful fundraising programs,” says the Huntington Theatre’s Maso, noting that according to Theatre Facts, donations from individuals accounted for 39 percent of Trend Theatres’ contributed income in 2002, by far the biggest share. Giving by board members more than doubled in five years; donations by other individuals almost tripled. Funds raised from individuals supported 10.9 percent more expenses in 2002 than in 1998.

The extent to which individual donors have dug deeper into their pockets to support theatres is even more amazing when you remember they did so during a time when investors were seeing the net worth of their personal portfolios crumble before their eyes. The Standard & Poor’s 500 Index lost nearly a quarter of its value in 2002, while the Dow Jones Industrial Average declined 16.7 percent. Factor in the aftermath of Sept. 11, and a funding disaster seemed imminent. In that sense, the most interesting fact about the aftermath of 9/11 is what didn’t happen. “In the post-9/11 world there was a lot of fear about what would be happening with individual giving,” says Tim Shields, “and the fear that it might be directed in other ways. I don’t think many organizations have seen that happen. Many have seen that, in fact, giving has gone up.”

Indeed, the bottom did not fall out. Among the Trend Theatres, contributed income rose to a new high in 2002, up 13.9 percent over 2001. Fears that audiences would evaporate as people stayed closer to home proved equally unfounded. On the contrary, theatres reaffirmed their relevance as gathering places for people in troubled times. Chip Walton describes the success his theatre had with their production of Coyote on a Fence by Bruce Graham, produced shortly after 9/11. “The play wasn’t directly connected to those events,” he says, “but it was an instance where global events, totally out of our control, created a local environment where a particular piece of theatre held an amazing amount of resonance for people.” Unfortunately, there is no formula for predicting which plays will succeed during any given crisis. “It’s always a crap shoot,” says Walton. He’s still smarting from poor ticket sales to a play produced during the first, tense days of the Iraq war. “It was not what people wanted right then,” he says.

“It was amazing how many people walked by our theatre who just wanted to come in and be a part of something that made them feel good,” says Kate Lipuma, managing director of the Signature Theatre Company in New York City. That good feeling extended to philanthropy. “We certainly have benefited from the fruits of generosity after Sept. 11,” she says, crediting civic leaders for helping the arts community make the case that the arts is a vital sector in the local economy—and a sector that should be supported in times of crisis. Some foundations even made emergency grants, even as they were predicting troubled times ahead.

As individual donors’ slice of the fundraising pie becomes larger and larger, theatres are pursuing them with a one-two punch: cultivation and communication.

For Richard Stein of the Laguna Playhouse, cultivation means making the most of every opportunity to broaden the circle of potential donors. He describes how this worked during the recent American premiere of Lovers at Versailles by Bernard Farrell. “Almost every night, we had a dinner party with Farrell and a handful of key donors and key donor prospects. It was a chance for them to rub elbows with the playwright and be charmed by him, and know that they’ve had a chance to be a part of the inner circle of the Laguna Playhouse.” Stein is quick to point out that not all artists are well-suited to this kind of fundraising, or willing to participate in it. Nor are the results immediate. “It doesn’t mean they write a check right at the end of the dinner,” he admits. “But the more you make people feel part of your family, the more responsibility they will take to help pay the bills.”

This is a case where a theatre identified a key asset—talent—and made the most of it, off stage as well as on. It’s a page from the playbook of political campaign fundraising, where money equals access, and glamour goes a long way. Likewise, special events are tools for donor cultivation. “We use our opening nights as cultivation events to invite key donor prospects,” Stein says. “Our development staff is very good at making sure that these people are greeted and feel warmly welcomed, but also get introduced to trustees, and to myself and our artistic director. Working the crowd at intermission and after the show is part of it, too.” Here’s the bottom line for Stein: “People give to people. Yes, there are people who love the idea of the Laguna Playhouse, but largely they are giving because they have gotten to know me, they have gotten to know [artistic director] Andy Barnicle, they have gotten to know other trustees, and they feel like they belong here.”

Cultivation is only half the story. Success depends, Stein says, on “how well we communicate with donors about what we are doing, both artistically and in terms of our outreach and education programs. People value what we do and want to support it.” Stating your needs can be important, too. “Our materials have changed in terms of how we communicate with our subscribers and individual donors,” offers Kate Lipuma. “I used to be very flowery when I was writing to people. Now we don’t beat around the bush. We put it on the line: ‘We need your help.’ I’ve decided not to be shy about that.” Has it worked? “Absolutely.”

The rise in individual giving also includes a group that by definition is especially committed to the health of a theatre: its trustees. Among the Trend Theatres, board giving is up 41.5 percent over 2001 and has risen an astonishing 136 percent (in inflation-adjusted dollars) since 1998 as theatres have learned how to tap what had clearly been an underutilized resource. One managing director after another reports that their trustees have stepped up to the plate, and not just by writing checks. “We have a fantastic board, and they’ve worked very hard to bring their friends and colleagues into the theatre,” Kate Warner says. “We had a board member throw a huge housewarming party for their new place, and in lieu of gifts, asked all of their friends—a couple of hundred guests—to make a donation to our theatre. It was wonderful.” And the theatre now has a new group of potential audience members and ambassadors.

“Our board has really stepped up in letting us have access to the specialists in their field,” says David Jobin, managing director of City Theatre Company in Pittsburgh. He describes how a trustee introduced the theatre to a utilities broker he had used at his corporation. “This might seem like an extravagance, but in fact our utility payments have gone down for two consecutive years.” And, because the broker takes his fee as a percentage of the theatre’s net savings, the cost to the trustee and to the theatre were both nil.

Two notes of caution about individual donors: “We’ve been riding a wave of generosity in the past couple of years,” Lipuma says. “It’s not that the generosity isn’t there anymore. People are hitting ceilings.” And Michael Maso has observed, “We are raising more money from high-gift individuals, but the corollary is that we are raising less from the small donors. Whereas the high-wealth individuals still have the capacity and inclination to support us, and in fact are doing so more than ever, those who don’t feel that they are in that position have cut back on their contributions. So we have far fewer donors at the $50 and $100 level.”

What’s more, cultivating individual donors may be the most time- and labor-intensive form of fundraising. Maso points out that raising money “doesn’t lend itself to efficiency any more than [producing] Hamlet does.” Tim Shields mentions that “it takes a lot of individuals to make up for just one corporate funder or foundation that goes away.” And Stein points out that individual donors require “a lot of investment of time on the part of your key leadership.”

Belt Tightening

During the heady days of the late 1990s, theatres added staff positions, opened new performance spaces and embarked on capital campaigns (none of the theatres surveyed began a new capital campaign in 2002). Nowadays theatre leaders face an acute challenge: how to do more with less, or, in many cases, how to minimize the effects of budget cuts on artistic programming.

At least one managing director worries that his colleagues were lulled into a false sense of security during the boom years of the 1990s, when the economy seemed to go up and up with no end in sight. David Jobin pulls no punches: “I don’t see theatres really addressing the uncertainty. We have all had such aggressive growth strategies, and now we are all about two years behind the curve…. There’s a generation of managers—and I probably fall into it—who may not be aware how bad things are. I wonder if we blindly think that this is just a tight cash-flow situation, and we’re misunderstanding that it’s something more grave than that.” He called the 2002–03 season at City Theatre “the best year we’ve ever had in terms of earned revenue and almost the best in terms of contributed revenue.” But, he laments, “Our growth plans were so aggressive that we still came up short in both categories, and we weren’t able to rein in our expenses in time to meet that crisis.”

A sobering analysis, to be sure. The authors of Theatre Facts write, “Time will reveal whether the deteriorated fiscal health of theatres in 2001 and 2002 was exceptional, caused by the terrorist attacks and a sagging economy, or whether the strong fiscal health of 1998–2000 was the exception.” Whichever the case, it’s important to keep in mind that theatres, like foundations, often base budgetary assumptions on multiyear cycles. For example, many theatres with endowments use a three-year average return to budget how much money they can count on from investment income in a given year. The effect is to shift decision-making onto longer-term trends rather than making year-to-year decisions. This can prevent a theatre from making unrealistically high predictions based on a single year of vigorous growth. Paradoxically, it can also initially discourage cutbacks when economic conditions sour. Because a three-year cycle ending in 2001 included the previous boom years, they may have skewed the figures too high for the new economic reality.

And so theatre leaders face difficult choices when it comes to balancing ambitious programming with financial prudence. “Fiscal responsibility is part of our culture,” says Grace Grillet, managing director of the People’s Light and Theatre Company in Malvern, Pa., noting that her theatre’s ledgers show only one deficit year in its three-decade history. “We’re very conservative about how we budget.”

“We’re getting better at anticipating the trends,” says Kate Warner. “When we do our budgeting, we take a very conservative look at what the market will bear.” She adds, “Getting Theatre Facts every year helps us. It confirms what we’ve been suspecting in terms of trends for the past two years, and we’ve been reacting to that.” Now more than ever, planning is an exercise in thinking both long-term and short-term at the same time. “Strategic planning is not just three to five years out, but it’s also six months to a year out,” says Michael Ross. “We’re not yet looking at plummeting government funding [in Maryland], but we should have an idea about what we would do if it did happen to us.”

At the Signature Theatre, Kate Lipuma identifies key check points well in advance, and revisits them during the budget year. She explains this in hypothetical terms: “If by Oct. 1 we haven’t met our subscription goal, we need to sit back and re-evaluate the entire budget for the entire year. We make some serious choices at that point…so that in January or February we’re not looking at a deficit that has grown.”

“Unfortunately, there’s not that much we can do about expenses we don’t have control over,” Lipuma says. “We need insurance. We need utilities. I need to fix the air conditioning. It has to be part of that budget. There are lines within your budget you can control, and that’s the scary part—when you go back to your production budget and say, ‘Maybe you can’t have $5,000 for props. Can you do it for $3,000?’ In the long run, how is this going to affect your product? Those are the lines you don’t want to touch. We’re asking everybody, from marketing to production to the business office, to look at their own budgets and say, ‘What can you do without this year and get through the season?’ Let’s keep it on the plate and see what we can do next year.”

Warner has tackled the same “scary part” by challenging her artistic staff to come up with creative cost-savings. “We use a lot of resident designers who have been very understanding and game, and who help us recycle a lot of our production elements,” she says. “What set do we have in storage that we could adapt and make into a new set? If you saw Cotton Patch Gospel, King Mackerel, The People vs. Mona, you saw the same platform come back out, just with a new paint job.”

But cutting costs is only part of the solution. The Curious Theatre is a relatively young institution that, Chip Walton says, is just beginning to hit its stride. “When you don’t have a whole lot, or when what you have is being taken away, you’ve got two choices,” he says. “One is to hunker down and hold on dearly to the little bit that you have, and the other is to say, ‘You know what, we need to keep doing what we do, and maybe in a time like this we need to do more of it.’ It’s a scary proposition, but in our case it’s worked. In times like this, we need to do more, rather than less.”

“Strong economies mask weak organizations; strong organizations emerge from weak economies stronger than before,” says longtime not-for-profit executive Peter Goldberg, the immediate past board chair of Independent Sector and a former trustee of two TCG member theatres. During tough times, he says, “it’s up to the board and the executive staff to differentiate between what is an expense and what is an investment in the future.” Organizational strength, he says, comes from refocusing on the mission when times are tight and allocating resources accordingly.

That might mean continuing to invest in building audiences, for example. “We’ve made a specific choice not to cut marketing dollars in a down economy,” says Tim Shields. “If anything, we try to market smarter and harder than during an up economy, and to not give up market-share willingly.”

Despite everything, most of the theatre leaders contacted for this article were bullish about 2003, and even 2004. According to Richard Stein, the Laguna Playhouse’s just-ended 2003 fiscal year “started out looking dismal, but turned out to be our most successful year artistically and financially in our history. We generated a surplus, and we initiated an endowment fund.” He pauses, then adds, “I’m always ready for the other shoe to drop.”

At the TCG Conference in June, Ben Cameron minced no words about the importance of thinking long-term: “Our challenge in looking ahead is not how to hunker down and survive, but how to meet the short-term challenges while positioning ourselves for the new chapter, even while we are uncertain as to what that new chapter will be.” That may be why, despite the uncertainty of the times, many theatre leaders are fundamentally optimistic, even as they listen for the sound of that other shoe falling. They are quick to tout valuable assets that don’t appear in the graphs and tables of Theatre Facts. “The best thing we have on our side is the goodwill of our audience,” says Kate Warner. And, of course, the quality of the work on stage and the creativity of artists and administrators are also crucial intangibles. By making the most of such assets, while all the time keeping an eye on their mission, theatres are positioning themselves to ride out the current economic malaise and build toward future growth. Forging connections with individual donors, energizing trustees, broadening the audience base, collaborating with other organizations, and presenting work that pushes institutional boundaries are all part of this project.

Michael Maso says he has a sense of confidence. “Although the economy is rough,” he remarks, “our expansion, our programming, our moving toward fulfilling the vision of what kind of theatre we want to be, are continuing forward with enormous board and staff enthusiasm.”

Ben Pesner has been writing about theatre since 1987. He is the content producer of TonyAwards.com and the author of the ACT II report “Closer Than Ever: Conversations About Relationships Between Commercial and Not-for-Profit Theatres.”