Endowment Campaign Takes Center Stage : Cash-poor Orange County Performing Arts Center kicks off a drive to quadruple its assets and close up its gaping 'income gap'

By ZAN DUBIN

April 22, 1990 12 AM PT

COSTA MESA —

With familiar fanfare, the Orange County Performing Arts Center has launched a drive to nearly quadruple the cash assets of its Endowment Fund, an investment fund intended largely to help bridge the inevitable gap between ticket sales and annual expenses.

Center officials say they already can count on more than $50 million in pledges to the endowment--but that’s money that may not come in for a long, long time. The pledges, most in the form of such deferred gifts as will bequests, are essentially IOUs, expected (though most are not legally binding) to be paid over the next 30 to 40 years.

Meanwhile, the endowment sits at only $3.2 million in actual cash, on hand and earning income in interest and dividends. In hard dollars, the endowment makes up less than 20% of the $17 million it takes to run the Center for one year.

Does that spell trouble? Compared with other major American performing arts centers, does Orange County’s endowment fall precipitously short?

The Kentucky Center for the Performing Arts has an endowment--all of it in cash--of $5 million, the same size as its annual operating budget.

The Tennessee Performing Arts Center, which also has a budget of $5 million, has a cash endowment of nearly twice that, $9 million.

On the other hand, ask Lawrence J. Wilker, head of Cleveland’s Playhouse Square Center, about that organization’s endowment and he delivers a Yiddish lesson: “You know what eppes means? Eppes means zero. We have zero endowment.”

The situation is the same at the Brooklyn Academy of Music, which nonetheless has managed to stay in business for 128 years, longer than any other performing arts center in the country.

Endowments, it seems, vary from place to place just as surely as programs and playbills, expenses and revenues. “There are no norms, no rules of thumb that I know of,” said David Eiteman, who teaches financial management of nonprofit organizations for UCLA’s graduate arts management program.

Just about everyone wants an endowment, though. No performing arts center can pay the bills on box office alone. Every year, charitable contributions or some other form of revenue must be used to meet expenses, which means that an enormous effort often must be spent on fund raising--an especially challenging task in an increasingly competitive market.

The Orange County Center had to come up with more than $4 million to cover its 1989 operating shortfall, to bridge the “income gap,” as officials there say, between between costs and revenues.

Endowment income is generated from principal assets that are set aside permanently. It is, therefore, impervious to the vagaries of annual fund raising and thus lends financial stability. Endowments can avert insolvency in worst-case scenarios, Eiteman said.

Furthermore, he added, by lessening reliance on ticket revenue, endowments can allow greater freedom to present more experimental or adventurous programming--which, according to some observers, has been in short supply at the Center.

The variance in endowments’ size--and whether they exist at all--has to do with several factors, experts say. Among them are a community’s financial resources, an organization’s age, whether it must raise money to construct facilities, and the length of time that’s been spent building the endowment fund.

How come the three-theater Tennessee Performing Arts Center has an endowment twice the size of its budget? Largely because officials there never had to ask the private sector for money to construct facilities, or cash to cover annual operating expenses, according to chief financial officer Gary Gossett.

The center, Gossett said, was founded in an established building and its officials don’t rely on private donations to bolster operating revenue, but on funds from such alternative sources as concession sales and theater rental. So, when Nashville community leaders trudged the fund-raising trail, they were asking only for endowment contributions. By the time their center opened in 1979, they’d already amassed $5 million for the endowment. “It would almost be suicide” to have simultaneously requested funds for an endowment and for construction and operation of three theaters, Gossett said.

Sure enough, officials at Playhouse Square, who had to raise capital to build and renovate their theaters, opted against an endowment drive. “You’ve got to give (donors) a break,” said Wilker, a former chairman of the Assn. of Performing Arts Centers, a nationwide service organization. Only now, he said, is development of an endowment under consideration.

Officials at the Orange County Center, though, wanted to have it both ways: They solicited building funds and started building an endowment, too. (Indeed, the endowment drive preceded the construction campaign. More than $73 million, about 30% of that in pledges, had been raised to build a single theater by the time the Center opened in 1986; the endowment began in 1982.)

However, as Center Chairman Henry T. Segerstrom explained recently, while the building campaign went after cash, “the thrust of the (initial) endowment campaign was in deferred gifts.” The upside was that the various fund-raisers didn’t find themselves competing with each other. But the downside is an endowment that today is mostly promises, not money in the bank.

Still, Eiteman and others gave the Center’s current total endowment a good rating. While cautioning that comparisons are tenuous, since community wealth and other factors can vary so widely, Eiteman noted that the Center “is a new organization and, in addition to start-up costs, it has been able to raise certainly a fair amount of money. It’s a good start, it’s a good endowment.”

So why, then, do Center officials want to raise more endowment cash? If the endowment doesn’t seem to be ailing, why not solicit money for other needs, such as education programs or outreach to the under-served, for instance?

A larger cash endowment is a priority basically because it would relieve some of that “never-ceasing” pressure of annual fund raising, Segerstrom said. He added, though, that the Center’s endowment is unrestricted; endowment funds may be allocated for education or outreach, as the endowment grows.

The goal of the new campaign is to increase the endowment’s cash assets to $12 million by the end of 1993. Segerstrom said that that would increase annual endowment interest to at least $1 million a year by the end of 1993. Endowment interest last year totaled $140,000, Center figures show.

Segerstrom said that in the long run--three to five years from now--a larger cash endowment could also mean more “daring” programming, and could allow the Center to produce more programming instead of importing events.

“The time to build your financial security is during those periods when your operating results are good,” Segerstrom said. “That’s what we’re trying to do.” Center officials say 1989 was a record year for attendance, that box office revenue covered 83% of operating costs. Typically, about two-thirds of a performing arts center’s budget is covered by ticket sales, according to officials.

Still, fund raising to support annual operations certainly won’t halt just because an endowment-cash campaign is under way. Is there potential now for competition between the two funding drives--the very thing the Center tried to avoid during its construction phase? And construction may not be over. The Center has announced tentative plans to build two new theaters by 1998. Couldn’t the new campaign mean competition when it comes time to seek new building funds?

Segerstrom acknowledged that there are no easy answers. “That’s a whole other area and we simply haven’t come to that,” he said. “We would obviously precede any further facility commitment by a very thorough analysis, a fund-raising study, so we would have some assurance before anything was started that there was a satisfactory donor base.”

MAJOR AMERICAN PERFORMING ARTS CENTERS OPERATING ENDOWMENT COMPARISONS

ORANGE COUNTY PERFORMING ARTS CENTER

Endowments (Cash assets only): $3.2 million

Annual operating budget: $17 million

LINCOLN CENTER FOR THE PERFORMING ARTS, NEW YORK CITY

Endowments (Cash assets only): $70 million

Annual operating budget: $40 million

LOS ANGELES MUSIC CENTER

Endowments (Cash assets only): $49 million

Annual operating budget: $76 million

KENNEDY CENTER, WASHINGTON D.C.

Endowments (Cash assets only): $24 million