SAN JOSE -- Despite the San Jose Repertory Theatre's aggressive efforts to cut costs, refinance debt and boost revenues, its financial auditors continue to question whether the troupe that has been one of the city's major investments in downtown revitalization can survive past August.
The Rep's latest financial audit noted that "the Theatre has taken substantial measures to reduce its operating costs, defer or eliminate certain programs, and continue to streamline production costs" and that its board "continues to support special fundraising efforts designed to pay down debt and secure additional working capital."
But the audit added that "there can be no assurance that these actions will be sufficient" and cited concerns that "temporary funding" provided by board members "cannot be relied on for future years."
"Based on these uncertainties, there exists substantial doubt about the Theatre's ability to continue as a going concern" beyond August, said the audit, completed in December by the San Francisco firm Burr Pilger Mayer for the Rep's fiscal year ending Aug. 31, 2012.
Auditors have been doubting the Rep's year-to-year survival as a "going concern" for years now. The Rep teetered on insolvency in 2006 before the city agreed to a bailout allowing the troupe to borrow up to $2 million from San Jose's general fund, with the limit shrinking over 10 years and a requirement to repay outstanding balances. The troupe continued to struggle
But during the Rep's most recent fiscal year, San Jose officials agreed to convert that $2 million bailout to a 25-year term loan, lowering annual costs by spreading payments over a longer period. City officials said it was a more realistic repayment schedule that would allow the Rep's survival.
Nick Nichols, the Rep's managing director since 2006, attributed the latest audit's doubts about the Rep's survival to a lack of cash reserves. Throughout its history, the Rep has covered its costs through fundraising, but "in the eyes of an auditor that's uncertainty," he said.
The Rep is trying to build a cash reserve of $150,000 to $200,000 to reassure auditors about the organization's long-term viability.
Though the recent audit indicates the Rep owes a balance of $1,964,999 to San Jose, with annual repayments scheduled to jump from $50,000 through 2014 to $65,000 in 2015 and $81,819 for the following two years under the 25-year agreement, city officials aren't worried.
"We monitor them on a monthly basis," said Kerry Adams Hapner, the city's director of cultural affairs. "They have aggressively and successfully reduced expenses. They're still actively seeking community support. They're continuing to do very good work on the stage. Ticket sales are doing very well. I feel personally optimistic about the Rep and its future."
Founded in 1980, the Rep operated out of the Montgomery Theater until it moved into its $24 million, 584-seat blue cube-shaped auditorium in downtown's Paseo de San Antonio in 1997. Built with $20 million in city redevelopment funds, it's now named after former Mayor Susan Hammer and her husband, Phil, who had fought to get it built. The troupe has enjoyed rent-free use of the building with the city subsidizing maintenance and providing annual arts grants from hotel tax receipts.
Like many city-assisted arts groups, the Rep has struggled in an economy wracked by repeated recessions after the bursting dot-com and housing bubbles.
Even so, it remains a key element in the city's effort to revitalize a downtown that had suffered in the 1970s and 1980s from suburban growth. A 2011 study showed the Rep draws about 75,000 visitors to downtown San Jose and contributes $9.1 million annually to the local economy, Hapner said.
Should the Rep fail, San Jose would either have to spend $685,000 a year to run the theater while searching for a new entertainment company or $105,000 to maintain a shuttered building.
Nichols acknowledged that after posting an operating surplus in the previous fiscal year, the Rep ended the most recent year with a loss due to unexpected maintenance costs on the aging theater building and weak fundraising offsetting a banner year in ticket sales. This year, fundraising is on track, though ticket sales have been slightly off, he said.
But Nichols, excited about the return of The Flying Karamazov Brothers to the Rep, expects that in the next couple of years, the troupe will have built up enough reserves to convince auditors that it will remain a going concern for the foreseeable future.
"I'm cautiously optimistic," Nichols said. "We've done a lot of the hard work that needs to be done."
Contact John Woolfolk at 408-975-9346. Follow him on Twitter at Twitter.com/johnwoolfolk1.