Breaking Even But We’ll Be Broke If Something Breaks

The National Center for Arts Research (NCAR) released the results of a study last week that, while not the most cheery news to release during the holiday season, is not terribly surprising.

Looking at the data of 4800 arts organizations, they found that it is becoming increasingly difficult for arts groups to meet expenses. They based these assertions on an evaluation of three data measures: unrestricted surplus before depreciation, operating surplus before depreciation and operating surplus after depreciation

Looking at unrestricted surplus (before depreciation), the average organization saw an unrestricted surplus of 2.1% of expenses in 2016. In the same year, overall operating bottom line (before depreciation) was 0.4% of expenses—virtually break-even. However, surpluses fell to a negative 4.2% when factoring in depreciation, meaning that the average organization is not reserving sufficient funds to repair and replace their fixed assets, which can lead to future challenges, particularly for organizations with high levels of fixed assets.

Somewhat surprising, smaller organization were doing better than larger ones when the three measures were applied.

  • Smaller-budget organizations, with lower fixed assets and less fixed costs, demonstrate the highest surpluses by all measures, continuing a four-year upward trend. Conversely, larger organizations tend to end the year with deficits, continuing a four-year negative trend.
  • Across all sectors, small organizations buck the overall sector trend—i.e. even in sectors where bottom lines trended downward, the smaller-budget organizations within the sector actually grew, sometimes by over 50%.

However, it should be noted that these three criteria aren’t necessarily the only ones that matter in organizational financial health. NCAR’s next step is to:

…take a look at working capital and access to available cash. It may turn out that organizations with high fixed costs and fixed assets also have sufficiently high levels of cash reserves to cover annual shortfalls and future asset repair and replacement. If not, organizations might consider how they can become more nimble if a break-even budget is a goal.

It is worth looking closely at the study data and methodology to get a better sense of what this all means.

For example, when deciding what budget size constituted a large, medium or small organization, they used different numbers for each artistic discipline. A $2 million budget makes a large theater or dance company, but a small art museum and a very medium sized opera or performing arts center.

Their notes on trends in the Opera sector say that one organization heavily skewed the results for the whole sector and that if left out, there would be a more positive trend. There are similar notes in other sections, especially breakdown by geography where nearly every metro region had an outlier skewing the data.

The other area of the report that was interesting was their Driving Forces section which left me asking “Why Is That…?”

Total Unrestricted Revenue Drivers

  • Having more arts education organizations, music organizations, and opera companies in a community tends to raise the unrestricted revenue tide for all organizations in these sectors in a market, while having more performing arts centers tends to lower the unrestricted revenue for all organizations in this sector.
  • As the level of individual philanthropy in the market increases, unrestricted revenue goes down.  The fact that there is more giving in a market does not necessarily mean that it is being directed to arts and cultural organizations.  Unrestricted revenue also tends to be lower in more densely populated communities and those where with proportionally more Asian Americans.

Operating Revenue Drivers

  • Operating revenue tends to be higher for organizations that target young adults or African Americans, and with higher levels of local and state funding.
  • More public broadcast activity in a market tends to drive down arts and cultural organizations’ operating revenue.

I am making a broad assumption that the observation about public broadcast activity is a result of competition for donated revenue. What I wondered was if there was a benefit to underwriting sponsorship on public broadcasting that helps offset that effect by providing additional earned revenue. Or is there no sense that one should support the activities of cultural organizations that support public broadcasting?

What I wondered about the observation regarding unrestricted revenue tending to be lower in densely populated areas was if this meant people in densely populated areas placed greater restrictions on the way funds were used or if they simply gave less. In the context of the sentence that precedes it, the answer would seem to be that people give less, but that doesn’t necessarily need to be the case.

It would be interesting to know if people in less densely populated areas placed fewer restrictions on their donations, perhaps implying a higher level of trust in the organization or a confidence in their ability to evaluate the effectiveness of the organization.

About Joe Patti

I have been writing Butts in the Seats (BitS) on topics of arts and cultural administration since 2004 (yikes!). Given the ever evolving concerns facing the sector, I have yet to exhaust the available subject matter. In addition to BitS, I am a founding contributor to the ArtsHacker (artshacker.com) website where I focus on topics related to boards, law, governance, policy and practice.

I am also an evangelist for the effort to Build Public Will For Arts and Culture being helmed by Arts Midwest and the Metropolitan Group. (http://www.creatingconnection.org/about/)

I am currently the Director of the Grand Opera House in Macon, GA.

Among the things I am most proud are having produced an opera in the Hawaiian language and a dance drama about Hawaii's snow goddess Poli'ahu while working as a Theater Manager in Hawaii. Though there are many more highlights than there is space here to list.

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