Cultural Alliance's Michael Norris & John McInerney's speech at the 2014 Cultural Alliance Annual Member Meeting

Introduction made by Michael Norris at the Greater Philadelphia Cultural Alliance's 2014 Annual Member Meeting

It was from the podium at last year’s Annual Meeting that we announced the imminent launch of our new teen program, STAMP, which gives Philadelphia’s high school-aged young people free admission to some of the city’s top museums and attractions. I’m thrilled to report that since last October, over 11,000 Philadelphia teens have signed up for a STAMP Pass and over 3,000 STAMP museum visits have occurred.

Other highlights include a new and improved visual identity and back end portal for Phillyfunguide.com, the first comprehensive salary and benefits report in almost a decade, and about 20 workshops, convenings and professional development opportunities that were attended by over 500 people.

On the advocacy front, we enjoyed two important wins by combining our behind-the-scenes government relations with powerful grassroots engagement by our GroundSwell advocates. First, we successfully maintained Governor Corbett’s proposed 5% increase for the Pennsylvania Council for the Arts in the General Assembly’s final, approved budget for FY15. And second, we successfully restored $1.3 million to the Philadelphia Cultural Fund’s FY15 grantmaking budget, a 70% increase, which will allow PCF to make larger general operating grants and to reinstate its Youth Arts Enrichment Grants. I’d like to publicly acknowledge Mayor Nutter, Council President Darrell Clarke and all the members of City Council who stepped up to show real support for Philadelphia’s arts and culture.

Underpinning this work—and everything we do at the Alliance—is a real commitment to research and data: using hard facts and quantifiable numbers to build our case, address the needs of our members and serve the larger community. It’s no accident that the theme of tonight’s meeting is “Investing in Knowledge,” which was inspired by a statement attributed to Benjamin Franklin himself, which reads, “An investment in knowledge pays the best interest.” 

There’s no greater example of the Cultural Alliance’s commitment to—and investment in—knowledge than Portfolio. This recurring report, first issued in 2006 and now in its fourth edition, provides a detailed look at the financial and operational health of the nonprofit cultural sector. Findings from Portfolio have allowed us to identify trends affecting our industry and recommend strategies to address our challenges. Portfolio has become even more relevant as we navigate the radically altered environment that emerged from the Great Recession. 

We are pleased and proud tonight to officially unveil the 2014 edition of Portfolio. To present some of the major findings, please welcome to the stage the Cultural Alliance’s Vice President of Marketing and Communications, John McInerney. 

2014 Portfolio Presentation made by John McInerney at the Greater Philadelphia Cultural Alliance's Annual Member Meeting

I want to thank everyone involved in producing this Portfolio, starting with the 473 groups that provided the data, and our core funders the Pew Charitable Trusts, the William Penn Foundation and PNC. I also want to acknowledge the folks behind the scenes: The Cultural Data Project, whose data stewardship made this report possible; our research partner, Metro Metrics; and our advisory group, who were one of our most important sounding boards. I also want to thank the internal team that produced the report: our project manager Theresa DeAngelis; our researcher, Nick Crosson, who recently jumped ship to the Cultural Data Project; and Britney Knight on PowerPoint. This is a tremendously complex project, which couldn’t have happened without them.

Portfolio is our signature research publication which looks at the overall health and scope of the cultural sector. I am going to give you the top key takeaways from the report, identify some of the opportunities and challenges we collectively face, and then talk about next steps.

First, I want to emphasize that this is the largest analysis we have ever done on the regional nonprofit cultural sector. In the past we have referenced the Economy League’s landmark 1998 study, Greater Philadelphia’s Competitive Edge, which examined 108 cultural groups in the first significant report on the cultural sector. For the 2014 Portfolio we were able to examine 473 organizations in the region—an almost five-fold increase. On top of that, we also examined trend data from 298 of those groups covering the post-recession years of 2009 to 2012.

That’s a significant amount of data. We examined 89 community arts and education organizations; 16 support and service groups; 215 dance, music, theater and other performing arts organizations; and 153 museum, visual arts, horticultural, historic and scientific organizations. These organizations ranged from budgets of under $25,000 annually to budgets in the tens of millions of dollars. While the largest organizations produced the majority of the economic activity, attendance and participation was spread throughout the sector. Small organizations, in particular, with limited staff and minimal funding, attracted 15% of total free attendance, and one in ten visits overall.

As we have pointed out before, our collective efforts are a significant driver for the local economy, and that comes out in the report. The nonprofit cultural sector attracted 17 million visits for over 33,000 productions, films, exhibitions and other work. That generated over $1.1 billion in direct spending, and involved over 65,000 paid and volunteer positions. Collectively, we have a workforce equivalent to the three largest employers in the region combined.

And we didn’t just measure our overall scope. We also looked at how we have collectively recovered from the recession. In the last Portfolio, released in 2011, we examined the impact of the recession on our activities, specifically looking at how we fared from 2007 to 2009, at the bottom of the Great Recession. The news then was not good. Revenues fell 43%; the sector had a collective negative margin of 10%; and endowments and net assets dropped double digits.

I can tell you that since then, we have shown significant signs of recovery. Over a period when the regional economy grew modestly at 2.2%, from 2009 to 2012, our revenues increased 3%; the sector as a whole broke even; endowments increased 12%; and net assets increased 7%. Just as importantly, more people engaged in our work, with attendance increasing 3%, and free attendance up 5%. Given the challenges from the recession, that is good news.

But where did that over 1 billion dollars in revenue come from? Collectively, earned income generates the majority of revenue for the sector. Admissions, tickets and tuitions is the most important source of revenue overall, at almost 20%, and it is closer to 25% if you include revenue from subscriptions and memberships. That is followed closely by investment and endowment income at 18%. Overall, earned income is 55% of total revenue.

On the contributed side, individuals remain the most important single source of philanthropic income, at 14%, followed closely by foundation funding at 12%. Contributed support is 45% of all funding raised.

It is also notable to examine the difference in funding sources between the smaller and larger organizations. At the top end of the spectrum, for Very Large organizations (those with spending over $10 million), earned income is critical, generating 3 out of every 5 dollars. As organizations decrease in size, it is the reverse, with the Smallest organizations relying primarily on contributed support. Whereas Very Large organizations generate most of their income from ticketing receipts and investments, at Small and Medium organizations (which represent 80% of all groups in the report), foundation giving is, by far, the single most important source of revenue.

This data illustrates both the importance of our collective impact and the diversity of funding in the sector. Unfortunately, that diversity was also evident in the performance of the individual groups. Despite relatively respectable numbers overall, there remain many groups that have significant financial challenges.

While the total groups in deficit declined somewhat since our last Portfolio, over

40% of the organizations examined this year reported deficits in the most recent Fiscal Year, half of them greater than 10%. Even more alarming, from 2009 to 2012, half of the organizations in our trend analysis were shrinking, and one third were both shrinking and reporting deficits. Clearly, many groups continue to experience challenges related to maintaining programming and sustainability.

However, there was another subset of organizations that we noted in our research. These groups not only had positive margins in 2012, but were able to expand operations in the period after the recession, most of them quite significantly. These groups made up about one third of the trend organizations we examined. While growth and positive margins are not the only ways to evaluate success, we think the characteristics of these “growth” organizations merit special attention. How are these organizations structured so that they are able to expand their footprint while generating surpluses? While we understand that some groups may be rightsizing and reducing activities to reflect budget and market demand limitations, these growth groups, if this trend continues, are likely to be the drivers of the sector’s long-term recovery.

Working with our research partner, Metro Metrics, we identified some key characteristics of these groups. First, they tended to not be the smallest or largest organizations, but mid-sized organizations between $250,000 and $1 million in annual expenditures. They also tended to be more evenly distributed throughout the region and were relatively younger than groups as a whole. It is also interesting to note that these growth organizations also had higher than average spending on fundraising and marketing, and their staffing tended to rely more on independent contractors than paid staff. Growth organizations also generated a larger share of paid attendance, with three out of four visits coming from paying visitors, vs. the sector average of closer to 50%. Even more notably, they increased paid attendance at almost twice the rate of the sector overall. Finally, it is interesting to examine the profit margins of the groups that were not growth organizations. Non-growth groups could have maintained positive margins while reducing expenses, and many did. However, when you examine their finances, you can see that across the board, not only did they not have growth, but the majority of them reported a net loss.

Again, I want to emphasize that there are many models of success, and this group represents just one approach. Susan Nelson, a noted researcher from TDC, presented the follow-up report to Getting Beyond Breakeven just last weekend at the Grantmakers in the Arts Conference. That study, which examined a smaller set of cultural nonprofits in Philadelphia, emphasized that growth should not be the goal in and of itself, but that growth should take place when new levels of activity are sustainable, and should only be done by organizations that are effectively capitalized. For the large subset of groups in Portfolio that have ongoing deficits and low levels of working capital, a growth strategy is probably not appropriate. The right market conditions, strong organizational health, and demand from the public are necessary to pursue a successful strategy of growth. However, if those conditions are present, positive growth can be effective, allowing organizations to expand their impact while building capital and capacity. We will continue to study these growth organizations over the next few years, both to better understand their business models and to see if they can maintain their increased scale of activity while remaining financially viable.

Beyond this two-part picture of growth and contraction of individual groups, there are also some larger trends that all groups are facing, particularly in revenue. On the positive side, revenue, adjusted for inflation, is up 3% overall. Attendance has also increased 3%. Membership revenue, generated primarily by museums, media arts, science and nature organizations, was actually up 24%, and admissions were up 10%. Overall, earned income, not counting paper gains on investments, was up 9%, a notable increase and a testament to the sector’s focus on diversifying income. The only downside on the earned side was subscriptions. Whereas the number of subscriptions appeared to remain relatively stable, the revenue from subscriptions declined 20%, which is probably not a surprise to many, as this reflects consumers’ demands for more flexible and affordable subscriptions that generate less revenue but appeal to wider audiences.

On the contributed side, the news was less positive. Since the recession, overall contributed income (again, adjusted for inflation), has been flat, at a time when giving to the arts nationally increased 22%, according to Giving USA. This is despite strong gains in foundation and board giving. Foundation giving (which as I noted earlier, is one of the most important sources of funding for most groups), was up 6%, and board giving, a smaller portion of contributed income, was actually up 27%.

However, those gains were wiped out by declines in almost every other source of contributed support. Despite the major success this year of increasing the Cultural Fund by $1.3 million, prior to that increase, all city funding had declined 64% from 2009 to 2012. At the state level things were similar, with a modest gain in the PCA budget this year of 5%, but prior to that, overall state funding for culture declined 26% since 2009. This is not just a regional issue. Grantmakers in the Arts’ recent analysis of public funding documented similar declines in local and state funding across the country.

On top of that, corporate and individual funding also saw declines. Individual giving, which was a highlight of the 2011 Portfolio, declined 12% in the current analysis. corporate funding, which has declined in every Portfolio since 2008, also declined by 23%. Corporate funding is now at just 2.2%—2 cents of every dollar that arts groups generate. This is particularly troubling given that corporate giving, according to the NEA, is 8.4% of funding nationwide.

We’ve been working on this report for several months, and have taken that opportunity to think about the trends reflected in this report and how we, as your service organization, and you, as cultural leaders, should respond to this data.

Don’t forget that the 473 groups in this report are at the heart of the creative economy. Despite the many challenges cultural nonprofits face, we continue to produce a dizzying array of activities for the region. With over 17 million visits annually, there is no other industry with such a direct influence on the region’s vitality and economic resurgence. Very few businesses can talk about that scale of impact.

And our activities are also a key driver for this region’s success nationally. Visit Philadelphia, which does such a great job promoting this region, sent around a video at the beginning of the year highlighting all the feature articles about Philadelphia in 2013. The majority of those stories focused on the activities and attractions produced by the people in this room, and documented in Portfolio. (And frankly, most of the other stories talked about all the great places to eat and drink after catching a show, film or exhibit.)

And that kind of impact is not limited to just tourists. The 473 groups in Portfolio are either located or active in every county and most communities in this region. Our impact at the neighborhood level, and our ability to bring individuals together, needs to be better recognized as one of the most important and valuable things cultural groups do. Of all that we do, community engagement is the one thing that we are both inherently well prepared to provide, and something that could be the key to our deficits in contributed support.

Our nonprofit model is based on the principle of mission-based activity and the ability to raise funds to support that mission. The findings of Portfolio have shown that we have made noticeable improvement in our ability to attract more audiences and increase earned income. Where we need to focus is on increasing contributed support. At the Alliance, we truly believe the key to that is working with other civic groups to solve the larger regional issues challenging us all, particularly public education, community revitalization and social equity. Not only does arts and culture have the power to do that, but it is one of our strongest arguments for increasing investment from corporations and individuals, the two areas where we have lost the most ground regionally.

Take education for example. Portfolio shows that children’s attendance at our institutions (either through schools or direct visits) has increased dramatically, up 17% since 2009, and now at over 3 million visits annually. This is particularly encouraging in the context of the many challenges facing public education, particularly in Philadelphia; not to mention that these kids are the future audiences for all of our organizations. That is part of the reason why we launched our STAMP program and now provide, with our members’ support, free access to 15 museums for over 11,000 Philadelphia teenagers. If you as an individual care about the next generation of Philadelphians, arts and culture is an important resource that needs your support, even if—like Mayor Nutter—you don’t take a good selfie.

Beyond education, it is incredible what we are already doing in neighborhoods across the region. If you visit GroundSwellPA.org, our website dedicated to highlighting our collective community work, you will be amazed at the scope of what is happening. From the Neighborhood Time Exchange, a new artist residency in Mantua which is a collaboration between Mural Arts, the People’s Emergency Center and OACCE; to programs like WXPN’s Musician’s on Call, which provides the healing power of music to hospitals across the region; or the new program from Art-Reach, which provides families that use an EBT Access card for food or family assistance with access to 17 regional attractions for just $2.

I want to come back to individuals for a second. The decline in individual giving is particularly challenging, given Philadelphia’s history of generous and wealthy individual philanthropists. Yet this too is not just a local issue. The Chronicle of Philanthropy, just two weeks ago, documented that the wealthiest Americans are giving at a lower rate, at the same time that middle class Americans are giving at a higher rate. As a sector, we need to focus on engaging individual donors at every level of the spectrum, not just at the top. From younger millennials, to aging middle-class baby boomers who have not been as active in philanthropy. And to tie this back to the larger issue of community impact, individual donors, according to the 2014 Culture Track national survey by La Placa Cohen, are not as motivated to give because of the programming or tax benefits of a nonprofit, but by the desire to support organizations that can demonstrate direct community impact. It is the #1 reason people say that they give.

Corporate support also needs to increase and, unfortunately, that is a local challenge. Despite the leadership of companies including Bank of America, Blue Cross, GSK, Lincoln Financial, PECO, PNC and many others, corporate funding regionally is dramatically lower than corporate arts funding across the country. Cultivating more businesses that support the arts is imperative if we are to sustain our multi-decade investment in the region’s world-class cultural assets.

The good news for corporate leaders is that a commitment to the arts is also a smart investment for the business community. Our economy is rapidly becoming a knowledge economy with the need for highly skilled creative employees. And those knowledge workers, a study by Steelcase reported, “want communities that reflect how they see themselves: as creative individuals.” Creative workers, the study reported, were interested in working for companies that are socially conscious and invest in both the local community and the world at large. This was particularly important to Generation Y or Millennials. This is the fastest rising class of workers overall, at 31 million and growing, and Philadelphia is leading the pack with the largest increase in Millenials of any major city. Businesses, both for-profit and nonprofit, can mutually benefit from the support of a rich and diverse cultural economy.

We know that the world is defined by change and uncertainty, now more than ever. In this increasingly competitive world, our organizations need to be both resilient and adaptable; well-managed and rightsized. Simply returning to where we were prior to the recession is probably not wise or even possible. Donor priorities and behaviors have shifted, and it is unlikely that government funding will return to its peak pre-recession levels.

Without a dedicated funding stream in this region for arts and culture—as there is for tourism—city and state funding must be fought for annually. But while many nonprofits struggle to stay viable, there remains tremendous value in the nonprofit model and the work we collectively produce. Cultural organizations are effective community-based groups which use their 501c(3) status to raise philanthropic dollars and create artistically challenging, accessible and transformative experiences that could not be produced in the commercial world.

And cultural nonprofits are adapting, embracing new models to respond to the changing environment. The recent mergers of Drexel University and the Academy of Natural Sciences, and the partnership between Brian Sanders’ Junk and Shiloh Baptist Church, are great examples of how merging organizations or sharing space can have a synergistic effect, improving both organizations. Co-working spaces such as CultureWorks have also provided smaller nonprofits the flexibility and administrative support they need to thrive on limited budgets.

Some funders are also becoming more flexible in how they fund artists, projects and organizations. For instance, several foundations are recognizing the need to fund general operations, and are providing funds for overhead and marketing within project grants. Others are funding one-time projects through fiscal sponsorship, like the recent Citywide, a celebration of informal artist-run galleries. The Cultural Fund has made it easier to apply for grants, with multi-year applications and the ability to apply for a specific project without being a formal 501c(3). That flexibility gives creative practitioners more encouragement to explore new business models beyond the formal nonprofit structure when it is appropriate. We should be open to a full spectrum of business models and creative endeavors with a focus on making arts, history, science and creativity key drivers for civic health.

Philadelphia has invested heavily in the cultural community, and we are seeing the benefits across the region every day. Lonely Planet declared that “Philadelphia is becoming known as an ‘art’ capital.” That kind of impact on tourism and neighborhood revitalization needs to be sustained. The alternative, as the Philadelphia Inquirer has said, would not only represent a loss of artistic output that has taken years to build, but “would put at risk tourism and population growth the city has worked hard to achieve.”

We hope you will join us in this coming year as we respond to the findings in this report and work with funders, civic leaders and the community to leverage the cultural sector as a positive force for change.

• We will be working with partners like the Association of Fundraising Professionals and Technical.ly Philly to host a series of informal and formal conversations about many of the issues raised by this report.
• We’re also going to work with the Center on Regional Politics at Temple University to launch a civic dialogue about dedicated cultural funding.

• We also encourage you to take part in two important events being presented by our peers. The first is the Chamber’s meeting on October 28^th at the Pennsylvania Horticultural Society, on how arts and culture can influence the economy of Philadelphia.
• The second is the Mayor’s Office of Arts, Culture and the Creative Economy’s third annual Town Hall event on November 12^th, where community leaders will look at changing patterns of cultural participation in the many neighborhoods beyond Center City. Information on both are on our website.
• After our holiday promotion, the PNC Arts Alive Holiday Spectacular, we will be launching two new initiatives next spring. The first, Phillyfunpass, will be a community-wide loyalty card for arts and culture. The goal is to encourage increased cultural participation while helping cultural groups capture better data about their patrons.
• And, second, with support from the Doris Duke Charitable Foundation, we will release the second component of Portfolio, “Culture Across Communities,” this spring. The report will be an 11-city analysis which will examine the differences and similarities within the cultural ecologies of some of the most dynamic creative communities across the country.

We recognize that these are challenging times. We are all working harder than ever to do the work that we love and that means so much to the communities we serve. We are honored to work on behalf of such an incredible community, and stand committed to be your partner, your advocate and your Cultural Alliance.