SMU NCAR REPORT HIGHLIGHTS

What We Have Done

We collected five years of arts and cultural data from the following sources: 1) Organizational data from Cultural Data Project (CDP), Theatre Communications Group, and National Center for Charitable Statistics; 2) Market data from the U.S. Census Bureau, CDP, and Consumer Confidence Index; 3) Cultural policy data from the National Endowment for the Arts, Institute for Museum and Library Services, and National Assembly of State Arts Agencies; and 4) Independent artist data from the Census Bureau. We integrated the data by mapping across organizational survey line-items and geocoding the 55,341 arts and cultural organizations, linking each to the characteristics of its market including sociodemographics, competition, cultural policy, and presence of independent artists. This has resulted in a spatial map of the Arts and Culture Ecosystem in the U.S., encompassing 189 metro- and micropolitan statistical areas and over 44,000 zip codes. To capture each organizations trade area, community characteristics closest to the organizations location receive the heaviest weighting, with weighting of characteristics decreasing as distance from the organization increases. This allows us to examine the health of arts and cultural organizations within the context of both their operating model and operating conditions. We worked with TRG Arts, Nonprofit Finance Fund, and a dozen industry professionals to identify 184 different indices of organizational health, all of which address a question related to health in the areas of contributed revenue, earned revenue, expenses, marketing impact, bottom line, balance sheet, community engagement, program activity, and staffing. We begin by exploring 8 indices indepth. We examine what performance was (i.e., averages), what drives performance, and what drives high performance.

What We Have Learned: Highlights of Average Performance on Multiple Measures by Sector, Size, and Geography
In 2012, Averages for arts and cultural organizations, overall and by sector: CONTRIBUTED REVENUE In 2012, the average arts and cultural organization paid for just over half of its cash expenses 53% - with unrestricted contributed funds, a figure that has changed little over the past 5 years regardless of annual shifts in the mix of organizations represented. o Community-based organizations (e.g., arts centers, folk arts organizations, community celebrations) cover 73% of their expenses with contributed funds whereas performing arts centers support only 42% of expenses with contributions. o Symphonies and theater companies both support 51% of expenses with unrestricted contributed revenue; this figure is 60% for opera companies and other museums. EARNED REVENUE AND MARKETING IMPACT Arts and cultural organizations earned an average of $22.26 per person who participated in the organizations program offerings (i.e., earned program revenue from admissions, concessions, parking, advertising, tuition, and corporate sponsorships per in-person attendee). o The large span of average program revenue per attendee by sector from a low of $4.10 for community organizations to a high of $53.72 for opera companies reflects the dramatic 1

differences in operating models between some arts and cultural disciplines. Other disciplines are surprisingly similar: performing arts centers and symphony orchestras had very similar averages on this measure, as did art museums and theater companies.

Earned Income and Marketing Index Averages by Sector

$Arts Education Art Museums Community Dance Music Opera Performing Arts Centers Symphony Orchestras Theater Other Museums Other Performing Arts $6.55 $6.31 $8.03 $1.84 $6.02 $13.15 $16.89 $28.77 $10.00 $2.70 $2.24 $4.10 $1.42 $8.65 $9.22 $2.56 $11.72 $36.21 $36.80 $20.00 $30.00 $40.00 $33.54 $27.59 $50.00 $60.00

Program Revenue/Inperson Attendance Marketing Expenses/Inperson Attendance

$39.57

$53.72

The average arts and cultural organization spends $4.11 in marketing expenditures, inclusive of marketing staff compensation, to bring in each attendee. o The average opera company invested nearly ten times the marketing expenses to bring in one patron as did community organizations: $11.72 versus $1.42, respectively. o Community organizations and museums of all kinds bring in more people for every dollar invested in marketing than other sectors. While opera companies have a higher marketing spend for each attendee, they also earn higher program revenue per attendee. Taken together, the net effect is $42 per person of earned revenue after accounting for the marketing costs to attract that person ($53.72-$11.72), the highest of any sector. At the same time, opera companies cover 60% of their expenses with contributions, an identical level to that of other museums (e.g., nature, history, science, or childrens museums), which bring in only $11.31 per attendee but attract nearly 5 times the number of attendees annually than opera companies. Symphony orchestras, arts education organizations (i.e., arts schools), and dance companies have nearly identical net program revenue per attendee of roughly $30.70. These represent a very different operating model than that of community-based organizations, which net $2.68 in earned revenue per attendee and support 73% of their expenses with contributed revenue. Similar to community-based organizations, music organizations (e.g., bands, ensembles, choruses) also have comparatively low net earned revenue per attendee of $6.66 (the difference between their program revenue less marketing expenses per person) and rely on contributions to cover 64% of expenses.

EXPENSES Every dollar of payment to artists and other program personnel (including curators, artistic program coordinators, arts educators, collections and production staff, etc.) relates to $2.24 of revenue for 2

the average arts and cultural organization. This translates to 45% of all operating revenue going to payment of artists and other program personnel. o Symphony orchestras and opera companies spend the highest levels of their total operating revenue on artist and program personnel compensation: 63% and 60%, respectively. By contrast, community-based organizations and art museums have operating models where 31% and 37% of operating revenue, respectively, goes to program personnel payment.

Expense Index Average by Sector

0% Arts Education Art Museums Community Dance Music Opera Performing Arts Centers Symphony Orchestras Theater Other Museums Other Performing Arts 10% 20% 30% 40% 37% 31% 54% 43% 60% 46% 63% 46% 44% 48% 50% 48% 60% 70% Artist & Program Personnel Exps./Operating Revenue

BOTTOM LINE AND WORKING CAPITAL The average organization had an operating deficit in 2012. On average, bottom lines became 6.8% worse when depreciation was taken into account, going from -4.9% of expenses before depreciation to -11.7% of expenses after depreciation. In each of the past 5 years, the average organization had 2-3 months of working capital, inclusive of current unrestricted investments and marketable securities. All sectors except general performing arts had positive working capital. o Arts education was the only sector to end 2012 with an average net surplus regardless of whether depreciation was in the calculation. o Art museums and other museums averaged the highest operating deficits before depreciation. Museums relatively high fixed assets are reflected in their high depreciation expenses, which drive deficits into even more negative territory when taken into account. At the same time, art museums had 4.3 months of working capital (the highest of all sectors) and other museums had 2.3 months. Our bottom line analysis focused solely on operating revenue and expenses while our working capital assessment included current investments aside from board-designated funds. Museums investments play a key role in their overall financial health.

10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0%

Bottom Line Index Averages by Sector

7% 2% 3% 2% -0.2% 0% Operating surplus/Expenses (before depr.)

-1% -6% -9% -12%

-2% -4%

-2%

-5% -6% -9% -10% -10% -10% -13%

Operating surplus/Expenses (after depr.)

-21%

-21%

COMMUNITY ENGAGEMENT AND PROGRAM ACTIVITY The average arts and cultural organization engaged the equivalent of 10.3% of its local population as attendees, donors, volunteers, artists, staff, and virtual audiences. Arts and cultural organizations brought in an average of $33,205 in total revenue for each program they offered in 2012, including productions, exhibitions, lectures, education programs, films, etc. In 2012, Averages for arts and cultural organizations by size: The larger the organization, the higher the percentage of its operating revenue that goes to pay for artistic and program personnel compensation. The smaller the organization, the higher the level of expenses it covers with contributed revenue. The larger the organization, the more it spends on marketing to bring in each attendee and the more program revenue it earns per attendee, with the spread between the two increasing as organizational size increases. The combined effect is that large organizations earn a net average of $25.76 per attendee, medium organizations $10.21, and small organizations $2.57. The smaller the organization, the more likely it is to run an operating surplus. Organizations of all sizes averaged positive working capital, with medium organizations having the lowest level and small organizations the highest.

Earned Revenue and Marketing Impact Index Averages by Organization Size $$20.00 $40.00 $3.48 $0.91 $13.25 $3.04
Marketing Expenses/Total $31.11 In-person Attendance Program revenue/ Total In-person Attendance

Bottom Line Index Averages by Organization Size -15.0% -5.0% 5.0% 3% Operating 2% Surplus/Expenses
(before depr.) Medium

Small

Small

Medium

3%
Operating Surplus/Expenses (after depr.)

-1%

Large

-7% -14%

$5.35

Large

In 2012, Averages for arts and cultural organizations by market cluster: We let the data tell us which markets are similar to one another based on population, density of arts organizations in each sector, level of state arts funding in the market, and median income. Five major markets stand alone: New York, Los Angeles, Chicago, San Francisco, and D.C. In addition, there are clusters of Large, Medium, Small, and Very Small markets covering 185 MSAs1. These titles relate to population more so than other characteristics. For example, the Large market cluster cities have a lower density of arts and cultural organizations in each sector than do the Medium market cluster cities. San Francisco had the highest arts and culture dollar activity per capita $895 followed by New York and D.C. at roughly $610 each. San Francisco also had the most arts organizations per 100,000 people. Medium markets had higher A&C dollar activity per capita than the Los Angeles market $163 versus $155, respectively. D.C.s arts organizations have the largest average operating budget and the highest proportional level of federal arts funding. Very Small and Small markets both average 21 arts organizations per 100,000 people. Chicago and Medium cluster cities average 26. Organizations in the Los Angeles area have the highest levels of unrestricted contributed revenue covering total expenses, the highest program revenue per attendee, and spend more in marketing expenses to bring in each attendee than other clusters, while Chicago organizations spend the lowest amount to bring in every attendee, followed by New York. Los Angeles and Chicago organizations spend a low of 38% of their operating revenue on program personnel compensation while New York and Small markets spend a relatively high ratio of 47%. To varying degrees, all clusters averaged a negative bottom line after depreciation. Organizations in the New York City area had the lowest bottom line averages both before and after depreciation. Organizations in the Large market cluster had the highest operating surplus levels before depreciation but not after, perhaps reflecting more recent investments in buildings, land and equipment for organizations in these markets in recent years. Organizations in Very Small markets averaged the highest levels of working capital, followed by those in San Francisco.
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Clustering based on number of arts and cultural organizations in each sector, population, median income in the market, and state arts funding per capita.

What We Have Learned: Highlights of What Drives Performance?

Here we share findings on what drives the performance outcomes we reported on in the Averages section above: our Driving Force Factors. We break it down by the questions we posed and highlight findings that emerged. What organizational characteristics affect this performance? Organizational age and size (total expenses) boost performance in every case. More local, national, or world premieres all lead to higher attendance and higher levels of total engagement, or the broader number of people engaged in the organizations activities (e.g. attendees, donors, volunteers, artists, employees, etc.). World premieres lead to higher total expenses while local and national premieres drive higher marketing expenses. Funders appear to prefer giving money for national premieres but not for local premieres. An organizations total square footage was positively related to higher attendance and engagement and more total program offerings, indicative of more supply as well as more demand. Presumably, these large organizations provide a wide array of offerings that both draw audiences and involve high levels of community engagement. More working capital led to higher program salaries but fewer total offerings. Organizations that target either young adults or African Americans tend to have a smaller footprint. They have higher levels of contributed revenue but lower program revenue, lower program personnel compensation levels and marketing expenses, lower attendance and engagement levels, and fewer total offerings. Space ownership elevates operating revenue and expenses, as well as total engagement, total offerings, and both current assets and current liabilities. Organizations with larger staffs and those that spend more on fundraising have higher contributed revenue and operating revenue; they also offer more programming and engage more people. Organizations that target kids (preK-12) have a larger footprint. They tend to offer more programs and have higher operating revenue and expenses, more attendance, and more total engagement. Current assets, current liabilities, and operating revenue are lower for organizations that target Asian Americans. Organizations that spend more on fundraising (including personnel) and marketing (excluding personnel) have higher current assets. How do socio-demographic community characteristics affect performance? Population has a positive effect on operating revenue, expenses, and total offerings. However, population size has a negative relationship with attendance and total engagement and it drives down current assets and increases current liabilities, leading to limited working capital. Higher median income in the community positively affects program revenue and current assets. Households with annual income above $200,000 tend to provide more contributed revenue to local arts and cultural organizations and they drive up expenses, but they have no effect on either attendance or program revenue and they drive down total engagement. These results are consistent with the idea that this demographic may be more likely to support many interests but have time constraints that prohibit them from attending all but a few. Communities with a high concentration of Asian Americans tend to have arts organizations with a smaller footprint on numerous outcome measures whereas those with a high concentration of Hispanics tend to have higher attendance, total engagement, and budget size. Longer commute times in a community bring down performance on nearly every outcome. 6

Attendance is lower when there is a high proportion of the population under 25. It also is lower as median age in the market increases. It appears that attendance is driven more by those in the lower end of the 25-64 range. Performance on most outcomes is lower when there is a higher concentration of people in the community with a graduate degree. Perhaps the high levels of education land people in careers that leave little time outside of work. The higher the median age in the market, the lower all performance outcomes except program salaries and total offerings; this includes lower attendance and lower total engagement, which contradicts general observations about the strength of greying audiences. A higher percentage of single-mother households tend to boost performance outcomes whereas more single-father households tend to negatively influence performance.

How do the number of and type of competitors complements and substitutes in the community affect performance? Having more hotels in the market led to higher performance on nearly every measure. Hotels bring in visitors to the city and a stronger arts scene may be part of the draw. Cities with more parks are fertile ground for fostering arts and cultural organizations with more total expenses, operating revenue, program revenue and total offerings. When there are more sports teams or zoos in the community and they have a significant link to some measure of performance, the link is always negative. Evidently, these entities compete with arts and cultural organizations for attention and resources. The same is true for cinemas except that arts and cultural organizations provide more program offerings when there are lots of cinemas, perhaps in an effort to compete for audiences. Higher concentrations of larger corporations in the community boost marketing expenses, physical attendance, total expenses, and program salaries. There is a big company effect that impacts arts and culture. Higher numbers of public radio and television stations drive lower attendance and fewer program offerings. Despite the promotion of arts and cultural events by these stations, there is evidently a substitution effect as some viewers or listeners opt to stay home for the broadcasts. For nearly every sector, the more arts and cultural organizations there are in a market per capita, the smaller the budgets of organizations in that sector and the fewer programs offered by each organization in the sector. Competition also decreases the contributed revenue and total operating revenue of organizations in the sector. Aggregate operating revenue of sector competitors per capita is a boost to all performance outcomes for organizations in that sector. What impact does cultural policy have on performance? The number of NEA and/or IMLS grants an organization receives has a positive effect on every performance outcome. Organizations that receive relatively higher proportions of their budget from state grants tend to have smaller budgets, lower contributed revenue, lower marketing expenses, and lower operating revenue but they provide more total offerings. Local funding as a portion of an organizations budget has the same relationship with outcomes as state funding with one exception: they differ in that local funding boosts attendance and total engagement.

What We Have Learned: Highlights of High Performance and KIPIs

The Drivers of Performance explored above explain some level of variation in the various performance measures. The higher the variation explained, the more the predictors are actually predicting performance. This step is critical because it creates a level playing field for all organizations. Before we can determine if an organization is truly performing poorly or well on some outcome, we have to take into account the organizations sector, its size, its location, its community characteristics, the local cultural policy conditions, and everything else we can think of that might affect its situation. Once we have done so, only then can we ask, All else being equal, is this organizations performance better or worse than that of other organizations on a given outcome? One reason performance may be better is simply that the managing and/or artistic leader makes good decisions. This likely grows out of years of experience, learning, and developed expertise that forms an intangible yet essential ingredient. It is difficult to observe and measure but not impossible. We capture this as a Key Intangible Performance Indicator (KIPI). Knowing what an organizations performance is on a particular outcome, we can account for all of the easy-to-observe-and-measure characteristics and then ascertain the extent to which good decision-making, expertise, strong reputation, and high quality offerings played a role (see the chart below). We cant account for 100% of an organizations performance there are still some random reasons that neither the driving forces nor KIPIs can explain but we can come close. We report on the effect that KIPIs have on each of the indices. Managerial and artistic expertise and good decision-making manifests itself differently given the inherently different sector and community characteristics, but it exists in all sectors and communities nonetheless. KIPIs are most valuable as a tool in examining an individual organizations performance on different outcomes relative to the rest of the field, all else being equal. As a service to arts and cultural leaders, we are working with IBM to create an online dashboard that will allow any arts and cultural organization to access or generate its own KIPIs. In the meantime, we can share the extent to which we are able to account for performance on a variety of measures. Explained Variation and Unexplained Variation Attributable to KIPI and Random Variation
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 14% 3% 4% 32% 50% 56% 60% 74% 43% 35% 30% 37% 22% 25% 15% 21% 37% 21% 25% 37% 25% 14% 15% 11% 38% 7% 27% 56% 52% 41% 61% 48% 64% % of Variation Attributable to KIPI % of Variation Explained by Driving Force Factors % of Variation that is Random

***Reports will be published online each quarter. For more information, contact Zannie Voss, NCAR Director, at zvoss@smu.edu or 214-768-3466, or visit www.smu.edu/artsresearch. 8