Transcript – Episode 36

Announcer:  This podcast is a project of the Massachusetts Cultural Council, a state agency committed to building creative communities and inspiring creative minds.

Scott Fraser:  Remind everybody in your community, the community who supports a nonprofit, that very much like all of our individual lives, the unexpected is going to happen.  When you’re talking about what you need, always make sure you get a contingency in there for the unexpected.

Anita Walker:  Hi.  I’m Anita Walker at the Massachusetts Cultural Council.  Welcome to Creative Minds Out Loud.  Our guest today is Scott Fraser, Managing Director of the Jose Mateo Ballet Theater.  Welcome to the program, Scott.

Scott Fraser:  Thank you for having me.

Anita Walker:  We’re going to talk about a really interesting and exciting topic, capitalization.  But before we get to that, can we talk about dance just for a minute, talk a little bit about what you’re doing at Jose Mateo Dance Theater.

Scott Fraser:  So my day job is at Jose Mateo Ballet Theater, but I like to be involved in the dance community in as many different ways as possible, so I’m a very proud board member at OrigiNations, and recently completed my tenure as the president of the Boston Dance Alliance.  For me, dance is an incredibly powerful tool, and specifically my interest in it is all around youth development, which really could lead into our conversation about capitalization, because dance happens in spaces, and spaces cost money.  So that would be my jump off point.

Anita Walker:  So, you know, the arts are so magical, that sometimes we just don’t even want to think about the fact that money is a piece of the equation.  In fact, one of the statistics we often talk about is that if you buy a ticket to any performing arts event, you’ve only really paid for about a third of what it costs for you to have that wonderful experience, which means that our cultural nonprofits, like yours, have to think about how they bridge the gap between earned income, and payroll, and heating, and expenses, and salary, and rent, and all the rest of it.  And we know that so many of our cultural organizations really have very little margin for error at budget time, and this was an experience that you faced at the Jose Mateo Ballet Theater, and decided, “I wonder if we could get a little more space, a little more comfort.”  Talk a little bit about that.

Scott Fraser:  So it’s very interesting.  The list of expenses that you talked about are things that need to keep the door open today, but there’s, when you’re building an institution, there’s this whole idea about how to keep the doors open long term.  And when you’re doing all of these investments in space, restoring historic windows, adding lighting systems, seating systems, dance floors, you can come up with the money sometimes effectively through fundraising efforts to buy them, but they depreciate every year.  And if you’re not careful, you’re going to have another one of these big bills up in front of you and no way to really address it.  So as nonprofit managers, it’s incredibly daunting just to pay the light bills, just to buy the toilet paper, just the real things that you can’t imagine not having to need.  But unless you can step back and take a longer view, you’re going to find yourself blindsided by the predictable unpredictable.  You know, we all know that the boiler is going to blow, that the roof is going to leak, that a bathroom is going to need repair, and you can really– I mean, one of the tools at the Cultural Facilities Fund are these building assessments.  You can even predict what you should be putting aside, but unless you’re considering those things as critical to your business, as the vendors that come after you every month, you’re never going to be able to paint the right picture for people to know what your services really cost.  When you talk about thirty cents of every seat, I think if you put in the capital at the real capitalization and depreciation number, the audiences aren’t starting to cover their cost, and unless we can develop a language and communicate our financial needs effectively, the philanthropic sector is not going to be able to support us, because we’re not even letting people know what we need.

Anita Walker:  So let’s talk about this case in point and how you really approached sort of a capitalization strategy in order to ensure that future generations would have an opportunity to benefit from this amazing organization.

Scott Fraser:  So we looked at capitalization around two major areas.  One was preserving the investment that we had made in the building.  The ballet invested several million dollars in a historic site, and we were watching it depreciate at about a hundred thousand dollars a year.  Most of the things were relatively new, so we weren’t being hit by bills, but when we came in, and we’ve done this exercise, I think, three times now with an engineer, and walked through, and really thought about what our repair and maintenance bills could be some years down the line.  Being hit with those would have been really destabilizing for the organization.  Simultaneously, we looked at what our operating cash flow needs were, and what kind of capital reserve would we need to serve as an internal line of credit.  We’ve been very successful at raising the building money.  We’re still struggling on operating, but we’re making headway all the time.

Anita Walker:  You know, one conversation you and I have had in the past, which might be a little bit of a surprise for some people, the solution is an endowment.  Your thoughts.

Scott Fraser:  So I’m very clear on my opposition to endowments for small and midsized organizations.

Anita Walker:  And say why that is.

Scott Fraser:  If somebody gave me a gift of a million dollars towards my endowment, a fiscally conservative board, which I hope people have in place, or a donor, would impose spending restrictions that are probably four or five percent of the corpus, and it would be really annoying to me as a manager to have a million dollars invested and not be able to use more than four or five percent to advance the mission of the organization.  I think, in nonprofits, I think there’s a lot of locked capital that can’t effectively be used.  We actually, even in building the capital reserve funds, we’re really clear that we didn’t want any permanent restrictions on the money, that we were asking people to give money to board designated funds that had very clear spending authorizations and purposes, but also in emergency situations would allow directors to use these capital funds to secure the future of the organization and advance missions.

Anita Walker:  So to put it in a slightly different way, you’re a development director.  You’re out raising money.  If you’re raising money for an endowment, you have to raise a hundred dollars to get four.

Scott Fraser:  Right.

Anita Walker:  Or you could go raise a hundred dollars to get a hundred dollars, and when you’re a small organization, that hundred dollars might be what you really need.

Scott Fraser:  I would totally agree, and I think people don’t understand the cost of managing endowments, as well, and a level of complexity that organizations with small staffs just aren’t best prepared to do.  And I actually found that talking to my major donors, both institutional and individual donors, they all had personal understandings about, you know, my need, you know, for flexibility in our funding, and for control.  You know, Ballet Theater has built a board capable of making those decisions financially responsible, and to hamstring the organization to only be able to use money in perpetuity in certain ways didn’t make sense.  My crystal ball doesn’t show out ten years, you know.  I’m lucky if I get next year really predicted well.

Anita Walker:  We’ve actually seen nonprofits go out of business with millions in the bank.

Scott Fraser:  And have to figure out how to dispose of it.

Anita Walker:  So that doesn’t mean an endowment isn’t appropriate in some cases, but when we’re talking about small and midsize organizations, and you’re trying to achieve fiscal health, and you’re on the treadmill, and you’re trying to meet payroll, and biting your fingernails at the end of the month, and pay the light bill, and utility bill, and, oh, my goodness, the roof leaks, first thing to do is.

Scott Fraser:  I think the first thing to do is to remind everybody in your community, the community who supports a nonprofit, that very much like all of our individual lives, the unexpected is going to happen.  When you’re talking about what you need, always make sure you get a contingency in there for the unexpected, and really be frank about what that is.  Many times fundraisers, I think, feel very apologetic that they have to ask for money, your trustees going out, and I think the value that we bring to the world is much bigger than the contributions that we get already.  You might as well tell people what the value really costs.

Anita Walker:  So what do you think, at least for this organization, is an appropriate reserve, or board designated fund?

Scott Fraser:  So I’ll tell you how we calculated what we thought we needed for a building reserve fund, and there are two ways to look at it.  One would be just funding depreciation.  All your fixed assets depreciate over, you know, a five, ten, twenty, thirty-nine year schedule.

Anita Walker:  And I’m going to ask you to pause, because I’ve heard the word “depreciation” a million times.  Tell us what that means.

Scott Fraser:  So what “depreciation” means in the most easy way to understand is you buy a new car.  Ten years that new car is no longer new.  It’s lost value every year, and if you were looking at it from an accounting standpoint, and you paid thirty thousand dollars for a new car, you would say, from my mind, an accounting mind, if that car cost you all your repair and maintenance, all your gas, plus one-tenth or three thousand dollars more that you already paid years ago, and you could just deal with that new thirty thousand dollar bill the next time it rose around, or you could start saying, “I know I’m going to need a new car, even though I just bought one.  Let me see if I can save three thousand dollars a year towards the replacement car.”  And that’s really the concept behind depreciation.

Anita Walker:  So that’s the concept you applied to your building.

Scott Fraser:  No.  We didn’t.

Anita Walker:  Oh.

Scott Fraser:  So we came in and had these system replacement plans.  What are the actual anticipated lives of the assets, of the physical.

Anita Walker:  Roof, heating.

Scott Fraser:  All of it.

Anita Walker:  Air conditioning, plumbing.

Scott Fraser:  And it recommended a seventy-five thousand dollar annual set aside, which was significantly less than our depreciation.  We try to fund depreciation, which in many ways has allowed us to grow this, but our actual repair and maintenance outlay is right around that seventy-five thousand dollars a year, so we’re not digging the hole any deeper, but there’s a gap between the seventy-five and the hundred and ten thousand dollars, so over a year we’re putting a little more and a little more away.  And it was very interesting to size what did we think a need would be, and, you know, the biggest one-time expense, and it was basically roof failure, and that was set at about five hundred thousand dollars.  So we decided, okay, let’s make sure that we could handle our biggest, unforeseen one-time expenses.  And the policy we can use the money for repair when it’s not in the bank in another account.  Should I need it to replace a broken window, it allows that unexpected thing to be taken care of.

Anita Walker:  So accumulating this fund or this reserve, was that a distinct fundraising initiative, or was it just sort of rolled into the whole annual?

Scott Fraser:  No.  It was actually a real, distinct fundraising initiative, and we started with a building reserve, because we had invested so much in a building, and we had so much risk if something happened, and didn’t really have the way to address it.  It was very sexy with funders about five or six years ago, and we were very fortunate to get seed funding in the amount of a quarter of a million dollars, which seemed like a fortune to me at the time, and our institutional funders and individual funders matched it within six months.

Anita Walker:  So the building reserve, good shape.

Scott Fraser:  Great shape.

Anita Walker:  The operating.

Scott Fraser:  Operating reserve is a work in progress.  We’re not a particularly high credit risk, so I’ve got lines of credit which serve the same function.  Those decrease year over year.  And I’ll tell you, it’s been a harder discussion with funders to talk about operating reserves than building reserves, and I think a building is concrete, and people have that experience in their own lives.  The roof goes, the car go, you know.  That’s all– it’s something very familiar to us.  I think the operating reserves are less so.  I think many arts organizations have a lot more peaks and valleys in their cash flows than individuals do in their lives, unless they’re hit by the unemployment events.  But, you know, for me, June is vastly different than December from a financial standpoint, so it requires a different kind of management than I have to practice in my individual life, you know.

Anita Walker:  So be more specific about that.

Scott Fraser:  So in June my income may be twelve thousand dollars.  In December my income may be half a million dollars.  My fixed expenses every month, I still have to pay rent.  I still have to pay fixed salaries, and, you know, managing cash through those peaks and valleys is an incredibly specific task in businesses that show such seasonality, and I think most of our performing arts organizations, many of our historic sites, many of our cultural educational organizations, face very, very similar situations.  And the younger ones of us, and I would say Ballet Theater is a thirty-one year old organization, is a young one, have yet to get ahead of the curve in terms of their expenses.

Anita Walker:  So basically when you’re trying to raise money for an operating reserve, basically define what you consider appropriate uses of an operating reserve.

Scott Fraser:  Boy, I think they’re very different for every organization, but what, in theory, they should be doing is not covering a structural deficit.  They should be used to smooth out cash flow ups and downs.

Anita Walker:  And venture capital, experimentation, that’s in a perfect world.

Scott Fraser:  I mean, when we’re out talking about that, and people are really starting to listen about this, risk capital and change capital I think are very different and to be thought differently for every organization.  So we create a lot of new work.  There’s risk in all of it, but we’ve embedded that risk in our operating budget.  We’re contemplating a change in business model, where community engagement would be our overarching business.  That would create a totally different need.

Anita Walker:  Revenue stream.

Scott Fraser:  Revenue stream, but also, I mean, for me, that’s an example of when an organization needs change capital, you know.  So we look at the capital reserve funds around building, around operations, around risk, and around change.  So it’s really simple to run these, I mean.  And, you know, and that’s without having the resources to hire a CFO, you know.  That’s the other thing, you know, how are small to midsize nonprofits dealing with issues of financial literacy, both on the fundraising side and on the internal side?  You know, how are they managing that challenge?  I mean, I’ve been in my job for thirty years.  I learned by making every single one of those mistakes, you know, and it’s new that technical assistance is being offered around financial literacy for nonprofit organizations.  I mean, this Master’s in Arts Management is pretty new, you know.

Anita Walker:  So some people say, “Why can’t you just run like a business?”

Scott Fraser:  Well, we do, except we have two bottom lines.  One is around our profitability, and that we’re operating like a business.  But then there’s social value that is every bit as important, and we have to measure our impact on both bottom lines.  So we talk about what we anticipate being our profit for the year, and what we would do with that, and how we would reallocate it along our balance sheet.  But every bit as important and what makes us a relevant organization is we do the same kind of thing around how many people we hope to serve.  What neighborhoods are they coming from?  Are we meeting a social mandate?  So I think, when I think about my peers, I think of them as people who are incredibly savvy, both business people, plus, you know, business people plus a little touch of sainthood in them, because it’s not– to me– in a ride home last week, I was thinking, “Oh, my God, why have I done this for thirty years?  There’s so many easier ways to make money.  There’s so many easier ways to make money than an arts’ organization.”

Anita Walker:  And why do you?

Scott Fraser:  You know, why do I, because I see children thrive.  I’m surrounded by music and creativity, and there’s a dimension to my life that many of my peers who have jobs that are about making money are incredibly envious of.  You know, there’s a meaning.  There’s a meaning.  And, you know, at the end of my life I may say, “Boy, bad decision.  I ran out of money at seventy-five.”  But I think the memories, and I think just how rich my experience and my walk through life is, and I think it’s from the artists, and the learners, and the people who are inquisitive, and creative.  It’s unmeasurable.  You know, a lot of people talk about the economic impact of the arts, and I get so annoyed because I think they’ve missed the forest for the trees.  For me, it’s the child who’s just lit up because they’ve accessed a part of them and are on a lifelong journey to parts of us that are more human than the calculus of paying bills.

Anita Walker:  And nobody can do that but the arts.  Scott Fraser, Managing Director of the Jose Mateo Ballet Theater, another one of our Creative Minds Out Loud.

Scott Fraser:  Thank you for having me.

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