TROUBLES AT THE JOFFREY : Joffrey Spent Payroll Tax to Stay in Business : Money: Internal problems are fueled by a growing debt to the Internal Revenue Service.

By DENNIS McDOUGAL

May 10, 1990 12 AM PT

TIMES STAFF WRITER

For at least the past two years, the Joffrey Ballet’s chief financial officer has periodically delayed paying payroll deduction taxes to the Internal Revenue Service in order to ensure that the financially beleaguered dance company would obtain desperately needed grant money from the National Endowment for the Arts, according to minutes of a April 6 Joffrey board meeting. The total held back amounted to at least $828,000.

The resulting fiscal chaos--apparently hidden by Joffrey executives from the 55-member board of managing directors until last month--grew so out of control that, as recently as April 6, according to the minutes, members of the Joffrey’s finance committee were being told in a closed door meeting that the 35-year-old dance company was “two to three weeks away from being bankrupt.”

At that same meeting, chief financial officer Lillian Piro tendered her resignation in a two-page letter to the finance committee, made available to The Times, only to be told that any decision to let her go would be delayed until June “to ensure the survival of the company.” By June, the Joffrey would end its Los Angeles engagement and the new fiscal year would kick in with expectations of new corporate contributions and government grants.

Piro, contacted Wednesday at the New York headquarters office of the Joffrey, declined to comment on either the Joffrey’s financial situation or her own resignation letter.

Public audit statements, tax filings, Piro’s resignation letter and minutes from the April 6 meeting, all obtained by The Times, show a number of unusual accounting practices and optimistic fund-raising goals, dating back nearly a decade. Since 1983, the Joffrey has operated at a greater loss each year, except for 1986, according to the dance company’s annual audit statements. In that year, the company’s year-end deficit was $150,454--about $107,000 smaller than the deficit from 1985. Since then, however, the Joffrey has finished each fiscal year, on June 30, with more and more red ink until last year, when its losses were nearly $1 million.

Including its outstanding taxes, interest and penalties, plus several hundred thousand dollars in existing unpaid bills, the bicoastal company may be heading for its first $2 million year-end deficit in June.

In her resignation letter, Piro said she started withholding payroll tax payments last fall in order to pay dancers, staff employees, the Joffrey’s travel agency, trucking company and shoe supplier. She did that, she said, to keep the troupe active and to bring in revenue at the box office so that the company would not have to close.

“I felt that it would be better to have the company perform to generate more income (cash) coming in each week from our Washington, D.C., engagement, our New York season, Orange County and Los Angeles “Nutcracker” performances,” Piro wrote.

Like Joffrey executive director Penelope Curry and other key executives in New York and Los Angeles, Piro had been counting on contributions, grants, donations and large audiences at each of the winter performances of the dance company in order to make up for the shortfall.

Twice before--once in 1988 and again last summer--Joffrey IRS payroll tax payments were withheld, according to minutes of the April 6 meeting, to maintain a smooth cash flow and to meet minimum requirements for the matching grant program of the National Endowment for the Arts.

For several years, the Joffrey has received annual NEA grants which require that the nonprofit Foundation for the Joffrey Ballet, Inc. maintain a $750,000 cash reserve fund. In order to keep that fund at a level that is satisfactory to the NEA auditors, money due the IRS was put into the account so that the company would not lose its NEA matching grant, according to minutes of the April 6 meeting. Last year, the Joffrey stood to lose $243,000 in NEA Challenge III grant money. Just last month, the NEA announced a new matching grant for the Joffrey of $245,000.

Contacted at his office in Washington, D.C., this week, NEA Inspector General Leon Lilly told The Times he was unaware of the Joffrey’s financial problems or its practice of banking withholding taxes in its cash reserve fund in order to obtain NEA grant money.

As early as June 1988, the Joffrey’s own auditors warned the board of directors and staff management that borrowing from the cash reserve fund might jeopardize their NEA grants.

“All borrowings from the fund shall be repaid within two years of the date of borrowing,” wrote auditors for the accounting firm of Lutz and Carr. “At June 30, 1988, the Foundation was not in compliance with these terms.”

Last June, according to the April 6 minutes, Piro told board member Edward Weinstein that she put $220,000 in tax liability money into the cash reserve account instead of paying the IRS. As a result, the Joffrey got its NEA grant but also had to pay about $18,000 in penalties and interest to the IRS.

Again last fall, additional IRS tax payments were withheld. By year’s end, the Joffrey owed $488,295.53 to the IRS. As of April 6, the company had paid $55,295.78, but had also incurred $37,307 in penalties and interest on the unpaid tax bill. As a result, the Joffrey owed $470,551.75 to the government just for its unpaid taxes from October, November and December of 1989.

A check for $119,705.79 to pay for overdue payroll taxes from last summer bounced in January, triggering an IRS penalty of $35,878.16. As of last month, the troupe had not paid $201,235.82 in taxes for the first three months of 1990.

If the Joffrey paid $50,000 a week until the end of June, the committee was told on April 6, it would be able to pay off its outstanding IRS debt.

The fiscal problems grew worse when Curry told the finance committee about a mystery item on the plus side of the ledger: $790,694 in “unidentified contributions.” She explained that the money had not materialized as she had expected, in part because many Joffrey donors had adopted a “wait and see” attitude due to the company’s “internal problems”.

Finance committee member David Holbrook, president of Marsh and McLennan, Inc., New York, spelled out the “internal problems” as an ongoing feud between executive director Penelope Curry and artistic director Gerald Arpino.

“If Mr. Arpino and Ms. Curry cannot work together as a team, the company will close,” Holbrook said at the April 6 meeting.

Three weeks later, Joffrey co-chairman David Murdock spearheaded a drastic reorganization of the largely ceremonial 55-member board of managing directors, concentrating decision-making power in a 15-member operating committee that he heads. On a 31-9 vote, the managing directors approved Murdock’s plan, which allowed for the immediate appointment of nine directors to the committee who, in turn, would select the remaining six members. (One appointee, Stephanie French, has declined to serve.) Murdock has been out of the country on business for the past week and is unavailable for comment, according to a spokeswoman for his Westwood-based Pacific Holding Corporation.

Arpino and several board members resigned in protest following the Murdock action, launching a civil war within the troubled organization that many Joffrey patrons fear will destroy it.

Shortly after resigning, Arpino forbade the Joffrey from using either his own works or those of the late founder of the company, Robert Joffrey. As executor of Joffrey’s estate, Arpino maintains he has control over licensing performances of his dances. In ongoing negotiations, Arpino’s representatives and the Joffrey board have come to a day-by-day interim agreement allowing for performance of the two mens’ works.

Curry has been critical of Arpino’s spending. In October, she told the board of directors that he had gone $150,000 over budget on the development of his newest ballet, “TWO-A-DAY.” Arpino subsequently told board member Barbara Levy Kipper, chairman of Chicago-based Levy Circulating Company, that his own accounting showed that he had actually come in $7,700 under budget in developing “TWO-A-DAY.”

Arpino’s resignation could not have come at a worse time for the Los Angeles run of the dance troupe’s season. Performances began May 2 at the Music Center with several of Arpino’s ballets already established in the schedule. A centerpiece of the annual fund raising efforts by the Los Angeles Friends of the Joffrey is a $1,000-per-person series of special performances.

Last year, the series raised $480,000 and netted $244,700 after paying out $235,300 in salaries, music, food, decorations, printing, stationery and other overhead expenses. The Friends of the Joffrey also tried to hold a raffle until it was advised by the Los Angeles Social Service Department that a raffle cannot be sanctioned by the city as a recognized charitable event.

1987-88 FINANCES

The Big Picture Total Revenues: $11,675,296 Total Expenses: $12,191,488 1988 Fund Balance: (516,192) 1986-87 Deficit: (411,799) Current Net Worth: (927,991)

Sources of Major Funding

Music Center Unified Fund: $991,375 N.Y. State Council on the Arts: $247,000 NEA: $243,000 David Murdock: $500,000 Diane Daisy Miller: $344,102 Eleanor Naylor Dana Trust: $300,000 SOURCE: Internal Revenue Service, 1988 Return.

NOTE: 1989 IRS Return is due May 15.

MAJOR EXPENSES IN 1987-88

Costs of Running a Ballet Company

Highest paid employee--executive director Penelope Curry: $84,000

Others: --wardrobe supervisor Dorothy Coscia: $62,206

--ballet master Henry Scott Barnard: $52,929

--musician/pianist Beatrice Rodriguez: $50,787

--music director Stanley Babin: $50,096

--plus 32 other employees: more than $30,000

Managing director/artistic director Gerald Arpino: $82,200

House costs: New York $903,675, Los Angeles $1,425,588

Marketing and promotion costs: $934,924