Building Financial Security amid Economic Crisis

The mission of the James F. and Marion L. Miller Foundation, established in 2002, is to enhance the quality of life of Oregonians through support of the arts and education. In the midst of the 2009 recession, the foundation began a six-year grantmaking initiative that provided general operating support to Portland’s five large arts organizations. The foundation made important shifts in its grantmaking strategy to help shore up the financial strength and stability of the Portland Opera, Oregon Ballet Theatre, Portland Center Stage, Portland Art Museum, and the Oregon Symphony. To various degrees, all of these organizations were challenged by budget deficits and diminished revenues, exacerbated by the severe economic downturn. At the time the initiative was launched, there was a general sense within the city’s arts community that several of these organizations would likely fail if action was not taken to support them.

The Miller Foundation believed that these five large groups played a significant role alongside small and midsize groups in both the city’s and the state’s arts ecosystem. The foundation was convinced that to fulfill its mission, it needed to do what it could to ensure the continued longevity, vitality, and creative capacity of each of these organizations. Six years after the launch of this effort, the foundation is looking back and reflecting on what worked — and what didn’t — in this unique philanthropic undertaking. We share our learning from this initiative with the goal of helping other funders who are considering making significant operating support grants to large arts groups.

In this article we present key findings from an assessment of the Large Arts Organization Initiative. We describe the primary benefits resulting from the initiative, the major strengths and challenges in its implementation, and grantees’ vision for the future now that the initiative is entering a new phase. We integrate the views of peer funders who worked alongside the Miller Foundation throughout the article.

The Initiative

Through significant multiyear grants — averaging $520,000 — and regular, highly structured grant reporting, the Miller Foundation aimed to increase the financial stability and sustainability of Portland’s five large groups (all of whom have grants through 2015). Throughout the initiative, the Miller Foundation worked closely with a variety of local funding partners, including the M. J. Murdock Charitable Trust, Regional Arts and Culture Council, Oregon Community Foundation, the Harold & Arlene Schnitzer CARE Foundation, the Collins Foundation, and the Meyer Memorial Trust. To varying degrees, these funders aligned their giving with the Miller Foundation’s grants, accepted a uniform grant report template, and shared relevant information about the financial performance of grantees. The Miller Foundation convened the peer funders twice yearly to discuss grantee performance, fiscal health, and initiative developments. Altogether nearly $20 million in general operating support was provided to the five organizations during the initiative’s lifetime: $14 million from the Miller Foundation and approximately $5 million through aligned grants from peer funders.

The primary requirement of the Large Arts Organization Initiative was a balanced budget. If an organization’s budget was not balanced in any given year, funding would be in jeopardy. This was a hard-and-fast, nonnegotiable condition for continued grant support from the Miller Foundation. Grantees were also expected to move toward having sufficient reserves to meet budgetary contingencies. For purposes of the grant, a balanced budget meant that normal recurring operating revenues had to meet or exceed expenses. When determining whether a budget was balanced, the foundation excluded funds that were transferred from restricted status or the transfer of unrestricted funds that were originally intended for buildings, endowments, or other special projects. In addition, a balanced budget could not be premised upon capital gains or losses, debt forgiveness, depreciation, or bad debt charges.

Evaluation Approach

An independent, external evaluator was engaged to design and conduct an assessment of the initiative in early 2015. The Miller Foundation’s overall goal for the assessment was to learn about the initiative’s strengths and challenges and, ultimately, use this knowledge to inform its future grantmaking activities, including planning for a grant program targeting small and midsize groups. The evaluator and the foundation’s leadership and staff collaborated closely to develop the evaluation approach and interview guide, including reviewing and providing feedback on draft reports. However, the evaluator was the final author of the report and presented the evaluation’s key findings to the Miller Foundation’s board.

Data for the evaluation were collected through confidential telephone interviews with multiple representatives from each of the five arts groups and at least one representative from each of the involved funders. Ultimately, eighteen individuals were interviewed during phone calls that ranged from forty-five to ninety minutes. The interview guide consisted of eight questions focusing on the overall impact of the initiative, the negative consequences of participation, strengths and challenges in the relationship with the Miller Foundation, and suggestions for moving forward with the initiative. The questions were provided in advance to respondents via email.

Funding Partners

When the initiative began during the 2009 recession, the region’s funding community immediately recognized the urgency and precipitous situation facing arts groups, including diminished foundation and individual giving. These circumstances were especially challenging for the five large arts organizations in Portland. During interviews, several funders noted that “we could have lost” up to three of the groups if there had not been financial intervention. In light of this situation, the Miller Foundation — in close collaboration with its colleagues — helped lead a collective response, which included aligned operating support grants among several of the funders.

This high level of collaboration throughout the initiative among the funders not only strengthened their connections with one another, it also led them to share information and thus build their mutual understanding of the grantees’ financial health. Several explained the situation in this way:

In general, the evaluation results suggest that the Large Arts Organization Initiative provided the funding community as a whole with a better collective understanding of the Portland arts ecosystem. Because they received a constant flow of information — very often during annual convenings organized by the Miller Foundation — the funders gained a “heightened awareness” of the city’s arts community. This was especially valuable for those funders who do not specialize in the arts.

Initiative Strengths

Several clear strengths emerged from the interviews. Chief among these was a focus on budgetary discipline. At the start of the work in 2009, grantees reported that they were in or near crisis and that they needed to take concrete action to stabilize their finances. As a result, the Miller Foundation initiative was perfectly timed in the wake of the economic recession. With its explicit focus on a balanced budget, the initiative spurred a higher level of budgetary discipline among grantees. Grantees described this discipline in the following ways:

The large size of the Miller grants — as well as aligned grants from other funders — galvanized board and staff attention around the goal of balanced budgets. Grantees were held accountable for this budgetary goal, and they knew they would lose their grants if their organization’s budget did not balance. This acute sense of accountability, the feeling of economic crisis that pervaded 2009 and 2010, as well as their deep commitments to their missions, led several organizations to make needed, but hard, programming choices that led to reduced expenses and balanced their budgets. As one individual stated, “It pushed us to make hard decisions that we might not have made — they were painful and they hurt.”

Grantees were also able to leverage their Miller grants by challenging their individual donors to give more and to deepen their financial support to the organization. For all of the grantees, the risk of losing Miller funding was too real a consequence to not take the initiative’s balanced budget requirement seriously.

Along with financial discipline and accountability, several additional strengths emerged from our analysis. Specifically, all of those interviewed reported that communication with the Miller Foundation was a major strength of the initiative. In fact, the open lines of communication — and the respectful relationship it reinforced — emerged as one of the clearest findings of our evaluation. Evidence for highly effective communication can be found in the results of a rating question. When asked to rate the relationship with the foundation throughout the initiative, the average rating was 6.7 (n = 12) where 1.0 was “not at all positive” and 7.0 was “extremely positive.” As one interviewee said, “We have a very frank, supportive relationship with Miller. We can be very honest and transparent.”

Anther important initiative strength was the foundation’s expertise in the arts. The Miller Foundation has deep experience and a proven track record in the arts that gave it credibility and persuasive authority when working with grantees and peer funders. Additionally, the large size of the grants demonstrated how seriously the Miller Foundation took the initiative. Grant size demanded everyone’s attention and spurred commitment to reaching the initiative’s goals.

Finally, as part of the initiative’s launch, each grantee underwent a rigorous and thorough financial analysis by an external consultant. A second consultant was engaged to review grantees’ periodic reports and provide summary analyses of these reports. The analyst’s summaries were distributed to all of the funders participating in the initiative. This growing data repository has enabled local funders to spot multiyear trends in grantees’ financial performance and key performance indicators. While grantees had somewhat mixed feelings about the emphasis placed on financial analysis, the participating funders relied upon the consultants’ reports. The robust use of external financial consultants enhanced the credibility of the Large Arts Organization Initiative and helped bridge potential knowledge gaps among partner funders. It also helped facilitate a more frank dialogue between the Miller Foundation and the large arts organizations.

Boards of Directors

Interviews provide important insights into the ways that grantees’ boards of directors responded to the Large Arts Organization Initiative. As part of the initiative, the Miller Foundation wanted boards to step up to their fiscal responsibilities in a more vigorous way, to become more fully engaged in financial management, and to actively contribute to a culture of financial discipline. Uniformly, interviews with both grantees and foundations indicate that this goal was achieved and boards invested in the initiative. In particular, the size of the Miller Foundation grants commanded board attention. Interviews made clear that board leaders were fully engaged and knowledgeable of the initiative and remained so throughout its life span.

However, for some grantees, there was a downside to this more vigorous board involvement. In these cases, the board’s adoption of the initiative became somewhat mechanistic, and board members did not exercise as much leadership as they might have to reconcile nascent tensions between artistic aspiration and financial discipline. Some interview respondents reported that their boards lacked reflexivity and, to varying extents, took budgeting steps out of fear rather than fully reflecting upon their work and exercising leadership in response to the Miller Foundation requirements.

Initiative Challenges

Interestingly, interviews reveal that the most significant challenge in the initiative’s implementation was its narrow focus on balanced budgets. Thus, the paramount focus on a balanced budget was both a strength and challenge. There was clear concern among all those we spoke with that the initiative was perhaps too predominantly focused on the balanced budget goal.

Some grantees and foundations thought that a balanced budget was only one benchmark of fiscal health and that it lacked sufficient nuance to accurately gauge the overall health of an organization at any given moment. When asked how the Large Arts Organization Initiative could be improved, these individuals wanted to see less reliance on quantitative measures of success and more opportunities to paint a fuller, qualitative portrait of an organization’s progress over time.

Others felt that the reductive focus on budgets stifled managerial leadership and consequently put a damper on creative thinking within the organization. In other words, some worried that the sole goal of an organization’s leadership became to ensure that the budget was balanced and, in the process, too many decisions were ultimately filtered through this narrow lens. The impact was a risk-avoidant culture. One individual explained the situation this way:

Finally, grantees were under robust financial reporting requirements that required some additional work and time beyond usual grant reporting. Though several grantees found this unpleasant, they did not see it as a major difficulty.

Moving Forward

As the initiative enters a new phase and the Miller Foundation considers how to maintain the momentum built during the course of the initiative, grantees are clearly in a stronger position than when the funding began. Almost uniformly, both grantee and foundation interview respondents indicated that the Large Arts Organization Initiative successfully reached its goals. Specifically, it contributed to greater financial sustainability for Portland’s large arts organizations. In fact, when asked to rate the initiative’s general impact, the average rating was 6.3 on a scale where 1.0 was “not at all positive” and 7.0 was “extremely positive” (n = 11). As one individual said,

The fact that grants were for operating support cannot be overlooked, and this fact contributes to the successful view of the initiative. As long as grantees maintained a balanced budget, they were free to use the Miller and aligned funds to support their general operations in any way they saw fit.

With the evaluation results in mind, the Miller Foundation has committed to continuing the Large Arts Organization Initiative. It will provide another $4 million in general operating support to the five groups through 2018 and has extended the grant period from two to three years. Based upon interview feedback, it is also loosening the balanced budget requirement to include maintaining or increasing both days of unrestricted operating cash (at year end) and unrestricted liquid net assets. Financial data will also continue to be collected and analyzed twice yearly, and grantees can now self-select three or four additional benchmarks to use as their annual checkpoints for future reporting.

While the foundation maintains its investments in these groups and the grantees move forward with greater financial security, everyone in the Oregon arts sector worries about the general state of funding. Grant funds for arts organizations — especially operating support dollars — are exceedingly hard to come by, and the funding landscape can be uncertain and shifting. As noted during interviews, just since the initiative began, arts organizations in Oregon have had to contend with the sudden retreat of a large regional funder and shifting guidelines among some local supporters. As a result, they are looking to foundations to help them continue building long-term sustainability and financial stability and to maintaining the momentum that they have coming out of the initiative. As the following quote suggests, these groups are hoping future funders can help them build financial reserves and capital that will enable them to weather economic downturns in the future:

Yet, despite ongoing funding challenges, all of the organizations involved in the Large Arts Organization initiative are in a stronger position than they were six years ago to take these on. And they are thinking about ways to take more artistic risks and to test new business strategies and models. In particular, they are looking to integrate their stronger cultures of fiscal discipline with greater freedom to experiment artistically and innovate:

Like grantees, peer funders want to see the momentum coming out of the initiative continue. In particular, they appreciate the level of collaboration and coordination that emerged from the initiative, and they greatly value the detailed financial analyses and insights they gained through the Miller Foundation’s reporting process and reports prepared by their financial analyst. As a result, they are considering ways to maintain a deepened culture of information data collection, information sharing, and collaboration. And perhaps just as important, through this evaluation process, the foundation has further strengthened its commitment to ongoing organizational learning. Before the evaluation was completed, both staff and board understood the power of data to help inform decision making. Now, with the findings in hand, they are better positioned to reflect upon all of their giving, including ways to enhance support for small and midsized arts groups and to more deeply integrate data collection and evaluation into grants management.

In 2009, at the height of the recession, the Miller Foundation took a major risk. Rather than retreating from highly challenging circumstances, it exhibited leadership and commitment to the arts and its community. It did the unexpected and doubled down on its investments to those organizations that were highly vulnerable but also played an essential role in the arts ecosystem. The Miller Foundation recognized the important role it played in the community and sector by developing the Large Arts Organization Initiative and by authentically involving its funding colleagues in the effort. Then, over six years, the foundation served as a linchpin in keeping the initiative relevant and stable. While the initiative had challenges, our evaluation and the views of those involved clearly demonstrate the power foundations have to strengthen and stabilize organizations when they take leadership, think creatively, and act responsively.