This article was published in Museum News, July/August 1999.
By Joan Marshall and Anne Farrell
In the mid-to-late 1980s, a major American museum conducted five building and renovation campaigns. At that time, the museum was heavily dependent on local public funding and had a very modest endowment of $25 million to help support an annual operating budget of $28 million. During each building campaign, donors were given the option of either contributing to new construction or to endowment. But because the museum did not make endowment building a priority or an attractive giving opportunity, little or no money was raised for endowment. As a result, the pressure on annual fund raising became increasingly high, and the museum experienced severe funding shortages and program cutbacks.
In many ways, this institution is not unique. In recent years, museums all over the country have determined that their operating funds are less than adequate. But if museums have been slow to expand their endowments, the fault may lie not with the donors but with the institutions themselves. Few museums have conditioned donors to think about endowment gifts and, as a result, boards have found it easier to fund raise for highly visible building programs.
But that situation seems to be changing. Though museums concentrated on grand building campaigns during the 1980s and early '90s, they are now turning their attention to endowment building. There are several reasons for this: The building boom of the 1980s left museums without adequate resources to support their expansions, leading to large budget deficits and difficulties in finding sufficient funds for museum operations. Moreover, many museums that had relied on a few major sources of funding are nowseeking to diversify their income by cultivating a broader donor base, an essential first step to launching an endowment campaign. The museum field has become increasingly sophisticated in its financial planning, a trend that has been furthered, in part, by foundations and government agencies offering significant challenge grants. Planned giving has also added a new element to the mix-a sizable source of endowment giving tapped by most major universities but, until recently, not fully exploited by museums. Then there is the state of the economy, which has seen a continual rise in a bull market over the last seven years. We can expect the trend in endowment building to accelerate as we face the largest transfer of wealth ever seen from one generation to the next, as much as $7 trillion to $10 trillion in the next 20 years.1
The benefits of endowments to museums are many. Not only do they ensure continuity in programming during periods of financial or political uncertainty, but they also can shelter an institution from the shifting priorities of corporate and foundation funders. In addition, they provide the resources necessary to allow an organization to confidently plan for the future. For donors, the benefits of endowment giving are equally compelling-an opportunity to provide a permanent legacy benefiting the institution far into the future. These gifts create an opportunity to share in an institution's future success by specifically targeting one's donation to fill a specific need, benefit a particular program, or provide a base of general operating support through an unrestricted gift. In any case, the lure of immortality that an endowment gift provides is a stronginducement that carries with it the knowledge that one can continue to touch people's lives long after death.
The Chronic Endowment Campaign
Many museums are finding ways to encourage ongoing endowment giving, in addition to conducting majorcampaigns. In fact, the notion of a "chronic campaign" for endowment is one that is gaining popularity throughout the nonprofit community. New York's Bronx Zoo, the first zoo to conduct an endowment campaign, successfully raised $20 million as a part of its Animal Kingdom expansion in 1976. At the successful conclusion of the campaign, which netted $6 million for the endowment, the trustees voted to allocate all future bequests to endowment. The zoo began actively promoting opportunities to nameendowments for department chairs. Today the zoo's endowment stands at $198 million, with 50 percent of its contributions over the last 10 years coming from planned gifts. The zoo has added two planned giving professionals to its development staff and actively markets its planned giving program to donors and financial planners through continuing education seminars.
The Museum of Contemporary Art, Los Angeles-one of the few institutions to have launched an endowment campaign separate from its building campaign-completed a $25-million endowment campaign in 1999.To encourage ongoing endowment gifts, the museum is now considering revising its donor-recognition policy. Under the proposed policy, only endowment gifts of $50,000 or more will berecognized on the permanent donor wall at the entrance to the museum, while other types of general operating support or program gifts will be recognized annually or in conjunction with the specific program. The California Science Center, also in Los Angeles, is considering a new proposal to endow lifetime memberships at the $1,250, $2,500 and $5,000 annual levels, for gifts of $25,000, $50,000 or $100,000, respectively.
An endowment campaign's success is less dependent on an institution's size than it is on its vision and leadership. Often this vision is clarified and made part of the museum's "story" through an extensive planning process undertaken by the museum's board and staff in preparation for a major campaign. Such planning helps museums articulate their value and importance to the community, a central element in any successful campaign. This was particularly true at the Albany Institute of History and Art, Albany, N.Y., which is currently completing a $12.5-million capital and endowment campaign. When Director Christine Miles joined the museum in 1986, the institute had never engaged in a long-range planning process. A feasibility study commissioned to prepare for the current campaign revealed that the museum had a very low profile within the community and was poorly positioned for a campaign. The study's results encouraged the staff to engage in a comprehensive planning process in which they addressed not justthe image problem, but also the need to expand the donor base, broaden the audience, and energize the board leadership. Inspired by the plan, the museum recruited new board members that reflected its retooled profile as an energetic, forward-looking institution. Staff also developed a marketing plan that emphasized the institution's importance to the community, and expanded their programming to focus on families.
In identifying families as a primary audience, the Albany Institute's staff realized that their facility needs were different from those originally envisioned for the campaign. It was clear to Miles that "museums of the future will have to be different, more flexible environments. Instead of a 500-seat auditorium, we wanted smaller studio spaces and galleries that could accommodate groups of parents and children for teaching." In addition to helping define the institute's primary audience and building needs, the planningprocess also educated the trustees. Miles felt this was critical in laying the groundwork for a successful campaign. To date, the Albany Institute has raised $10 million toward its $12.5-million goal, $1 million of which is designated for endowment. Throughout the fund-raising process, donors have been encouraged by the endowment component of the campaign. But the director admits that the endowment goal will not cover the museum's increased operating needs, which will be much greater as a result of the building expansion. The endowment goal was based on what staff and board felt they realistically could raise, a pragmatic but often impractical approach taken by many museums considering endowment-building efforts. For theAlbany Institute, endowment building will be an ongoing process that will have to be sustained long after the current campaign comes to a close.
This case study exemplifies how valuable the "chronic campaign" concept is to institutional stabilization. The concept recognizes that museums' needs for endowment building are never-ending, and that museums have historically underestimated those needs when designing so-called "capital campaigns." The line between "capital" and "endowment" campaigns should be blurred. In fact, building "capital"-whether that capital is used for bricks and mortar or for the endowment fund-should be an ongoing effort and a preoccupation of museum staff and trustees alike.
How Large is Large Enough?
Institutions that once considered their futures secure through a sizable endowment are now realizing that they must expand their development and membership efforts or, in some cases, launch such efforts for the first time. For example, staff and trustees at the Nelson- Atkins Museum of Art in Kansas City, Mo., founded with a substantial endowment in 1933, saw the value of their endowment eroding steadily as a result of increasing operating needs and the effects of inflation. Many museums that have expanded their collections and programming to serve a broader and more diverse public have found that their endowments are now falling short of their operating needs. That has certainly been the case with a number of well-known institutions endowed by wealthy founders, such as the Amon Carter Museum, Fort Worth, Tex.; the Huntington Library, Art Collections, and Botanical Gardens, San Marino, Calif.; and the Menil Collection,Houston, to name a few. Even Barry Munitz, president of the J. Paul Getty Trust, Los Angeles, has hinted that the Getty-home to one of the world's best-endowed museums-might consider fund raising in the future.2
Inflation also led to a loss in the purchasing power of many early museum endowments. Until the 1960s, in an effort to be fiscally responsible and prudent, most museum trustees conservatively invested endowment funds in bonds, which produced a dependable amount of spendable income and saw little fluctuation in value. Unfortunately bonds do not hold their value during periods of inflation, which were particularly severe following World War II. And what became known as the "prudent man rule" prevented institutions from shifting their endowment investments to stocks. This "rule" was first established through a court case in 1830 (Harvard College v. Amory), which set the legal standard for fiduciary responsibility by trustees of an endowed institution. The rule required a trustee to "observe how men of prudence. . . manage their own affairs. . . considering the probable income as well as the probable safety of the capital to be invested." Over time the interpretation of the rule narrowed to favor investments in bonds over stocks or the safety of the original gift over growth. States such as New York issued legal lists of acceptable institutional investments that did not include stocks. Only in the 1960s did such institutions as the Museum of Modern Art, New York, begin to challenge this standard by investing in stocks and evaluating equity growth along with yield. As a result, the "prudent man rule" was reinterpreted. Today, organizations consider total return-a portfolio's value over time, composed of both income and appreciation, realized and unrealized-when calculating the spendable draw on an endowment.3 For instance, organizations can now consider as assets interest and dividend income as well as increased stock value, even if those stocks are not sold to realize the gain.
But this shift in investment policy was too late for the Nelson-Atkins Museum, which faced a series of chronic annual deficits in the 1990s.The board decided to launch a $35-million endowment campaign to stabilize operations. As they were developing the campaign case statement, the staff and board realized that they needed much more than money. In a lengthy planning process conducted by an outside consultant, the staff and board were asked to envision the role that the museum could play in the community, given sufficient resources and space. The result was a 15- year vision statement. The nine-point statement articulated the museum's mission and guiding principles and established a framework that addressed collections preservation and presentation, special exhibitions, education, the visitor experience, audience, development and marketing, staffing and governance, and fiscal stability and endowment building. The board was so intrigued by the possibilities of the director and staffs vision that it increased the campaign goal to $125 million: $75 million for the endowment and $50 million for renovation and new construction.
Before the campaign was publicly announced, $100million had been raised from trustees and a few key supporters. Since then, the museum has expanded the campaign again, upping the goal to $175 million. This increase will cover a construction budget that has nearly doubled to $80 million and also expand the overall endowment goal. The board prudently insisted that an increase to the construction budget should be matched with an increase in the endowment goal.
Many museums -in fact, most museums- around the country operate with inadequate (or non-existent) endowment funds. Generally, a minimum prudent ratio for an endowment to operating fund is 3 : 1 to 5 : 1. That is, if a museum's operating fund is $1 million annually, it should have at least $3 million to $5 million permanently invested, with interest income generating from 15 to 25 percent of operations. Another good rule of thumb is the "5-percent draw," a policy that permits the museum to use no more than 5 percent of its endowment income, with all additional earnings reinvested in the endowment fund. This is a percentage common in universities, but less so in museums, where it is more common to draw a greater percentage of the endowment for operations, thus hampering the fund's growth through reinvestment.
Institutions that want to use their endowments even more prudently will take that 5 percent on a three-year running average-that is, a 5-percent draw based on an average of the past three years' endowment earnings. Others may use that formula but draw an even smaller amount-perhaps 2.5 to 4 percent averaged over three years.
The Museum of Contemporary Art, San Diego (MCA), is an example of a small institution that struggled for many years with a modest endowment. In 1997, MCA's operating budget was approximately $3.5 million, and its endowment was barely $4 million-a long way from the ideal ratio. The result was a seemingly never-ending tension between income and expenses. The museum's artistic vision and the growing demands of visitors far outpaced the annual operating support available from individuals, corporations, foundations, and government agencies. In the late 1980s, similar to other museums around the country, MCA launched a building campaign that included only a modest endowment component (10 percent of the total goal). When the building campaign concluded in 1996, the museum had succeeded in reaching its $13.5-million goal for the capital expansion, resulting in a handsome, expanded building in La Jolla, designed by Robert Venturi, and a new second location in downtown San Diego. But MCA also faced pressure to increase its endowment to a level more commensurate with its ambitious program goals.
Immediately following the new building's inauguration, the trustees initiated a strategic planning process, the result of which (not surprisingly) was an institutional consensus to launch a 21st Century Endowment Campaign, with a goal of raising $10 million by 2001, the museum's 60th anniversary. Director Hugh Davies and the development staff applied to the National Endowment for the Arts (NEA) for a major "Planning and Stabilization" grant to launch the endowment drive. In April 1998, NEA gave the museum$350,000-the largest such grant awarded that year. The subsequent publicity and community accolades provided an important jump-start to the endowment campaign. Within a month, the family and foundation of a trustee, David C. Copley, donated $1.5 million to endow the director's chair, and between April and December 1998, other trustees stepped forward with another $3 million in cash gifts and charitable remainder trust commitments.
The museum was well on its way to achieving 50 percent of its endowment goal in the first year, and then an unexpected turn of events made national headlines. In January 1999, MCA learned that it was the recipient of a $30-million bequest from the estate of Jackie Axline, a trustee, and her late husband, Rea, after Mrs. Axline's death in December 1998. The gift was magnificent in its simplicity: the entire amount was to go to the endowment fund, "from which only income is to be used for the general purposes of the Museum." With this gift, MCA had suddenly jumped from being an artistically respected though struggling and poorly endowed institution to one of the best-endowed contemporary art museums in the country.
While this Cinderella story-the dream of every director and development officer-may seem unusual, it may become more familiar as the next decades unfold. The United States is facing an unprecedented transfer of wealth, as the generation born and raised during the Depression and World War II passes on, after amassing considerable assets in the boom years of the American economy. Their children, the "baby boom" generation, are now aging and beginning to consider their own legacy for the future. What better opportunity for "immortality" than permanently endowing a museum's exhibition program, education offerings, or directorial or curatorial chairs? The Axlines and their extraordinary largesse-not only to MCAbut also to the San Diego Museum of Art ($30 million) and the California Institute of Technology ($60 million for scholarships)- provide an excellent role model for both patrons and museums.
The MCA case study also exemplifies a definition of development, the word most commonly used to describe a museum's fund-raising function. In fact, successful fund raising is primarily about developing relationships, trust, and an ongoing partnership with one's donors and trustees in an effort to achieve an institutional vision. That was certainly true with Mrs. Axline, who had served on the MCA board since the late 1970sand was closely aligned to the institution's growth and struggles over the years. Every institutionhas one or more such patrons, who are deeply invested in the mission, vision, and goals of the museum. They understand the importance of endowing operations and thereby ensuring the museum's survival far beyond the lifetimes of the current supporters, audience, and staff.
Putting endowment building high on the priority list will therefore be increasingly common as museums move into the 21st century. This will give them an opportunity to, quite literally, "capitalize" on the wealth transfer that has already begun to be felt in American communities large and small, and guarantee a level of financial stability for museums that was elusive in the 20th century. The burden on trustees and staffwho must simultaneously run annual and endowment campaigns is probably the greatest challenge of the "chronic campaign." But, in the end, donors and the public must be reminded that the only dependable key to a museum's successful future is the presence of a strong-and continually growing endowment.
REFERENCES
1. David Schmeling, "The Stewardship of Endowment," Fundraising Management 26, no. 12 (February 1996), p. 16(4).
2. Suzanne Muchnic, "J. Paul Getty Growth Plans Rattle Nerves in Art Circles", Los Angeles Times, Dec. 6,
1998.
3. Susan L. Prenatt and John von Brachel, "The Endowment Goose and Its Golden Eggs," Journal of Accountancy 180, no. 3 (September 1995), p. 66(6). II
Joan Marshall is director of development, Autry Museum of Western Heritage, Los Angeles, and Anne Farrell is development director, Museum of Contemporary Art, San Diego.
