Former MCAD/201 State Treasurer speaks up . . . . Gives the Council his two cents on the Overture . . . a kinda grim outlook. But hey, that’s his job, to be the fiscal conservative voice, perhaps they should listen. Prepare to have this conversation again in a few years, he says.
First this:
From: Dana Chabot
Sent: Sunday, November 21, 2010 3:38 PM
To: Bidar-Sielaff, Shiva
Subject: RE: Responses to your inquiriesShiva, I’ve been wrestling for some time with how, if at all, to convey to alders my observations about the proposed Overture-City partnership. I guess in sending my comments to you and Chris I pretty much let the cat out of the bag. You may forward them to your colleagues. However, could I ask that you also forward this preface? I’d like to emphasize my support for any reasonable proposal that settles the MCAD debt, even as I take issue with some of its specifics.
You have my best wishes as you continue your deliberations.
Dana
Here’s the rest of his comments.
From: Dana Chabot
Sent: Friday, November 19, 2010 1:00 PM
To: Schmidt, Chris; Bidar-Sielaff, Shiva
Cc: Nino Amato
Subject: Responses to your inquiriesShiva and Chris,
I was asked by an MCAD colleague to offer my observations on the plan to turn operation of Overture Center over to a private organization. I was the Mayor’s designee to (that is, I stood in for the Mayor on) the MCAD board from Jan. 2004 through Sept. 2010. I served as MCAD treasurer from 2005 – 2010. I was also a board member of 201 State during this period, and its treasurer. I left the boards in September because of changes in the way these boards were being run. During the past two years power has been consolidated in the hands of the board chairs. I was not comfortable continuing on those terms—i.e., excluding the boards as a whole from involvement in matters as important as the terms of debt settlement and reorganization of Overture.
Although I was not directly involved with development of the “focus” model, I have gotten pretty familiar with the AMS financial projection that is central to it. I realize that your deliberations are moving in a slightly different direction, with building ownership and operation being handed off to a private organization. But the financial projections related to operation of the Center are still relevant. They are the best, most detailed look at what it will take to keep the place running. My view is, and has been that the “focus” model is likely to leave the Center’s operations underfunded by as much as $400 – $500,000 per year. I communicated my reservations to Steven Wolfe, both in writing and during his presentation of the projection on July 7, 2010, and on several occasions earlier this year. (I was one of two “no” votes on proceeding with the “focus” model back in January.)
My reasoning for this conclusion is below—if you care to delve into the details. But my main point is that if the likelihood of repeated operating shortfalls is not dealt with now, the Overture issue is likely to resurface in another few years. Neither MCAD nor 201 State has the reserves (or net assets) to cover any future operating shortfall. So if the place continues to run losses (as it has during each of its past 4 years), then the City will be back in the predicament in which it finds itself today.
As I see it there are two possible long-term remedies. One is simply to face the reality that a larger public subsidy ($1.9 vs. $1.4 million per year) will be required to keep Overture stable. A second remedy is to require that someone—MCAD, 201 State, or the new operating entity—build an operating reserve of $2.5 – $5 million, and make future City support of Overture conditional on having such a reserve in place. Or some combination of the two ideas: offer to match private contributions to an operating reserve on a 1:1 basis up to a total of $2 million in public funds. This would give the new operating entity time to get its legs and figure out how to run the place without consistently incurring operating losses.
I regret that my colleagues on the MCAD board and I have put you alders in the tough spot in which you now find yourselves. It stems from never having thought through how much it would take to run a gargantuan facility such as Overture when the facility was still on the drawing board (and, of course, on the demise of the Overture trust fund). That said, in my opinion it would be tragic to let the debt settlement unravel. Even if nothing can be done to improve the deal that’s before you, I think you should vote in favor of it.
Dana Chabot, formerly treasurer of MCAD
************************
Following are the facts on which I base the conclusion described above:
The AMS projection anticipates very robust net income from Overture performances, including Broadway and non-Broadway Overture Presents events. The projection anticipates “gross profit” from Broadway ticket sales of $940,000 per year. (This is the amount available to cover overhead costs.) It assumes 60 performances per year, with 67% of available seats sold for each performance. By comparison, from Fall 2007 through Spring 2010 ticket sales averaged 64% of capacity, but there were only 30 – 40 shows per year. (Spring 2010 was an exception because of Lion King—there were 63 performances.) The big question is whether they can maintain ticket sales in the 65 – 67% range if the number of shows almost doubles. We have had a history of wide variation in ticket sales. Blockbusters like Lion King sell out. But less spectacular shows do not. For example, in Fall 2009-Winter 2010, The 39 Steps filled only 41% of the house, Grease did 47%, Rent did 48%, and Little House on the Prairie topped out at 67%. With Lion King we averaged 72%. Without it, we were at 51%. This is a long way from the benchmark in AMS’s projection.
Suppose Overture is only able to fill 55% of the seats over 60 Broadway performances. Ticket sale revenue drops from $4.70 million to $3.86 million, and (assuming a gross profit margin of 20% per the projection), gross profit drops from $940,000 to $770,000, a loss of $170,000.
For non-Broadway Overture Presents events, the projection anticipates 41 performances in Year 1, with 65% of available seats in Overture Hall sold, and 69% of seats in Capitol Theater sold. By contrast, ticket sales over the past 3 years have averaged 62% and 56% in Overture Hall and Capitol Theater. If the historical rate of ticket sales were to continue, gross profit from non-Broadway Overture Presents events would yield $120,000 less than projected in the AMS model.
Using realistic ticket sales projections leaves Overture $300,000 short of the benchmark for annual ticket sales revenue.
My analysis of the expense side of the projection suggests that personnel costs are likely understated by $100 – $200,000 annually. The “focus” model calls for adding 10 new positions to the 50 already existing. However, it projects that the cost of fringe benefits and payroll taxes remains roughly constant ($842,000 compared to $836,000 budgeted for the fiscal year ending June 30, 2011). In other words, the projection anticipates sharp decreases in employer contributions to health insurance and retirement plans. If these reductions cannot be achieved, then personnel costs could rise by as much as the amounts indicated above.
I conclude that the AMS projection can anticipate a balanced operating budget for the “focus” model only because of the bold assumptions it makes about ticket sales (to say nothing about private fundraising), and its aggressive approach to reducing employee benefits. A more realistic projection could leave the Center underfunded by $400,000 per year, or more.
This would be less of a concern if MCAD and 201 State Foundation had substantial net assets, or available reserves. Unfortunately, as of June 30, 2010, MCAD had fully depleted its reserves (I believe the audit will show that MCAD had negative net assets of minus $150,000). 201 State’s unrestricted net assets were barely positive. So there is no cushion, and no way to cover operating deficits in the future.
