In a Downturn, Museums Remain Big Spenders
Cautious Investments, Big Donors Offset Stock Market’s Decline, Shrinking Endowments Ahead
By Jason Edward Kaufman
ACCORDING TO the July-August issue of The Art Newspaper, the sky is about to fall on museums. Strategic planner Adrian Ellis, chief executive officer of the London-based firm AEA Consulting, writes that they are building too much too fast, expanding not for space but to raise money. Refinancing through capital campaigns is a Ponzi scheme, he says, and museums will soon discover that “aggregate operational cost has grown faster than income.”
The sagging economy already “is reining in dramatically the forward plans for capital expansion,” he claims, reporting that “throughout America one can hear the sound of fractious meetings between peeved and thwarted staff and chary, chastened boards whose animal spirits are palpably dampened.” Today’s economic climate has produced one high-profile casualty: the abrupt resignation last week of San Francisco Museum of Modern Art Director David Ross after only three years on the job and $140 million in acquisitions. Board chairman Elaine McKeon said his departure was caused at least in part by the museum’s inability, in a weakened economy, to bankroll the kinds of projects he wanted.
But a survey of major U.S. museum managers and financial experts yields a more nuanced picture than the one painted by Mr. Ellis. Despite recent dips in the market value of their endowments, most museums have avoided slashing programs or staff and are moving forward with planned construction. While many have felt the economic slump — particularly smaller institutions with less well-established donor bases — income accrued during the long bull market, coupled with conservative investment and spending policies, has cushioned the impact of the downturn. So have admissions, shop sales, food sales, reproduction royalties, rentals and special events, which collectively supplied 28.6% of museum operating budgets in 1999, according to a study by the American Association of Museums.
Endowments generated only around 11% of budgets in the AAM survey. These revenues are crucial because they cover such unsexy costs as maintenance and security. But the linchpin of museum finances is private benefaction. “Between 75% and 84% of total giving to nonprofits comes from individuals,” says AAM president Ed Able, and “people tend to cut back when the value of their stocks falls.”
Yet, surprisingly, most museums-particularly the larger ones-have not yet been severely hurt by the slump, and many are proceeding with campaigns in excess of $100 million. “There is some very aggressive strategic planning” going on, says Ken Kurzner, a managing director with First Chicago Bank who oversees cultural and private-education borrowing. “My sense is they have taken a hit but are not adopting foxhole mentalities.”
The Metropolitan Museum of Art is six years into a $650 million capital campaign that has netted “about $460 million,” says development chief Emily Rafferty. “We have not adjusted our fund-raising or strategic goals or minimized our programming in any way, and don’t project that we will. Assuming that the downslide doesn’t go further, I think we’ll be okay.”
The Museum of Modern Art is raising $650 million for its expansion and, according to director Glenn Lowry, has half a billion dollars in pledges with $200 million in hand. “The economic climate makes everyone a little nervous. But in real terms it hasn’t had yet a substantial impact,” he says, citing increases in attendance, membership, and foundation and corporate giving. MoMA’s endowment has grown from $250 to $435 million in five years, with a 17% increase in calendar year 2000 — while the Dow Jones Industrial Average posted a 6% loss. Even in the difficult first quarter of this year, it grew 2.1%.
MoMA’s investment committee, headed by trustee Leon Black of the Apollo Group, allocates “about 30% in domestic equity, 10% in private equity, small allocations in real estate, 20% in market-neutral strategies including hedging, and 25% in fixed income,” according to Chief Operating Officer James Gara, who says the downturn precipitated “minor tweaking” toward a “more defensive position” featuring a “value bias in equities,” with little exposure in tech stocks.
Museums — like institutions of higher education — maintain diversified portfolios weighted towards low-risk and fixed-income investments, and disciplined spending policies based on multiyear averages of income. John Nelson, senior vice president at Moody’s, where he heads the division for higher-education and not-for-profit ratings, explains that the standard practice is to “take the average value of the endowment over the last three years, then spend 5% of that in the current year. So if the value goes up or down during the three years, it’s not going to dramatically affect the payout in the current year.”
The J. Paul Getty Museum in Los Angeles, a division of the Getty Trust, operates solely on investment income. The trust annually spends approximately 5% of the three-year rolling average of the endowment’s total market value. The endowment reached $5.2 billion in January but, as of July 31, had declined to $4.9 billion. Bradley W. Wells, the trust’s vice president for finance, says he’s more worried about California energy costs than the economy. “We’re in stocks for the long haul,” he says, noting that around 65-70% of the endowment is in equities and 25-30% in fixed income. The board “takes a conservative view” and won’t adjust the budget unless a trend continues for years, says Executive Vice President and Chief Operating Officer Stephen D. Rountree, adding that the museum is increasing staff and remodeling the original Getty Villa in Malibu.
Christopher Goldsmith, executive director of the Milwaukee Art Museum, says its annual giving has increased, “up about 10% from same period last year.” But the market has lately become a factor in his effort to find the last $14 million for a nearly completed $100 million expansion that has added an ambitious new building by Santiago Calatrava. “It certainly has put the edge of fear into donors who would consider seven-figure gifts.”
The market dropped too late to affect Guggenheim Museum Director Thomas Krens’s plans for Las Vegas, where a 63,700-square-foot branch will open next month. But it may affect something else: an enormous building by Frank Gehry to be sited on the East River in lower Manhattan, with projected cost ranging as high as $900 million. The city has promised $67.8 million, and museum chairman Peter Lewis, head of Progressive Insurance Corp., has pledged his support. But could a recession kill it? Stay tuned.
Michael Conforti, director of the richly endowed Clark Art Institute in Williamstown, Mass., plans to expand the museum and research center despite concerns that “the ability to raise capital funds may become more difficult in a weaker economy.” He says the $269 million endowment has lost slightly less than 5% from its high. But increases under the leadership of trustee James E. Moltz, vice chairman at the ISI Group, Inc., help mitigate short-term fluctuations.
Maxwell Anderson, director of the Whitney Museum, says its endowment dipped slightly in March but by April had bounced back to $48.5 million, an all-time high. The board hasn’t changed its investment strategies and has enlisted architect Rem Koolhaas to create a master plan for expanding into properties the museum owns adjacent to its current site.
Although the Art Institute of Chicago’s $550 million endowment lost 3% in fiscal-year 2001 after posting solid gains in the previous two years, hedge funds that short the market have been “very successful,” says finance and operations chief Bob Mars. “Fortunately,” he adds, the downturn “is occurring in a year when we’ll be doing a major Gauguin-Van Gogh exhibition, so our revenues from other sources — membership, sales, shop and restaurant — will be buoyed by that show.” Mr. Mars doesn’t see a link between the market and fundraising, so the museum has not modified its $200 million expansion plan, much of which will be financed with tax-exempt debt.
David Galligan, administrative director and treasurer of the Walker Art Center in Minneapolis, says annual fundraising is up 8% over last year, “but it’s the endowment that perhaps has the greatest influence, not so much earned income or fundraising — which may even help to bridge gaps.” After a 15% increase in endowment income in fiscal year 2000 and 6% last year, he expects only 2% in 2002, not enough to match the 6% increase in total budget. “Nothing fundamental has changed about our market outlook or investment posture,” he says, quipping, “for an avant-garde museum with cutting-edge programs, we’re very buttoned down.” Though it’s going ahead with a planned $90 million expansion, the museum eliminated 2.5 full-time positions on July 1 and has cancelled two exhibitions.
In other words, the slowdown has not had a dramatic impact on museums, and while some experts fear the effects may lag a couple of years, most museum managers are optimistic that they can proceed with their expansions and keep programs intact. In a cultural-sector report to be published next week, Moody’s concludes, “The current building boom among cultural institutions will continue, driven by growing community and philanthropic support.” A prolonged slump, however, would increase pressure to ratchet up revenues from attendance and retail, fostering more of the crowd-pleasing entertainments that are altering the very nature of our museums. And that would be a far worse outcome than running a deficit or simply failing to build another wing.
Jason Edward Kaufman (c)
This article appeared in The Wall Street Journal, August 21, 2001, p. A17.