In this series of posts, EdCom’s Trends Committee is taking a deeper look at emerging phenomena identified in the 2020 edition of TrendsWatch from the Center for the Future of Museums. In this post, they dive into financial capital, with a breakdown of terms and case studies from museums that have adapted during the course of the pandemic.
As museum staff, our institutions’ financial health and finances can feel foreign and complicated, but it does not have to be this way. With this piece, we hope to introduce you to some terms and questions around your museum’s financial capital, give you prompts to support your journey of understanding and examining your museum’s financial strengths and weaknesses, and provide case studies on how an institution’s financial health impacts museum educational missions. We hope to build your power and influence so you, too, can make significant contributions and choices for museums and guests. No longer is the day that we are not all responsible for our institution’s finances, and in the words of Dennis Wint, “No margin, no mission.” Let’s go forth and learn.
So let’s begin with How Stuff Works: The Financial Capital Edition.
The financial capital section of TrendsWatch: The Future of Financial Sustainability looks at ways museums have been investing their money over the past several years to create new income through interest, dividends, and capital gains. Museums can use this capital to make significant changes to their organizations, from preventing bankruptcy, to updating exhibits, to changing capital improvements.
One of the most significant terms to know when it comes to financial capital is an “endowment.” What is an endowment? The tenth edition of Merriam-Webster’s Collegiate Dictionary states that to endow is “to furnish with an income for the continuing support or maintenance of an organization.” Sounds nice, right? You have a pot of money invested for you, so you will always have income. But this should start to get your mind wondering…how much is endowed? By whom? For what? How much income do we see from it yearly?Skip over related stories to continue reading article
Endowment funds are investment tools with a catch: they are “assets that have been given to the museum on the condition that the principal of the gift is to be kept intact and that only the investment income it produces can be used to meet the museum’s needs” (Daughtrey and Gross, p. 76). In other words, the benefit is that someone, or many people, wanted to give you an Easter egg to help you out for years to come; the catch is that in times of trouble, you cannot touch it.
When a museum refers to its endowment, it is typically using it as a broad term to describe multiple funds or charitable gifts established for various purposes. These funds have been invested for the museum, and at times, can be paid out as part of its income balance (usually 4 to 6 percent, typically yearly.) There is a beginning principal, which is what the donor gave the museum for its endowment, then there is the income generated off the endowment’s investments. But remember, there are always fluctuations in the market, which can result in a gain or loss in the base fund’s value.
There are four different types of endowments:
- Unrestricted – Unrestricted endowments are monies that can be used at the discretion of the institution. The museum leadership team has the power to save, invest, or spend down this type of endowment.
- Restricted (or true endowments) – In restricted endowments, the principal or core donation of funds is locked down in perpetuity, but the profits are used per the donor’s guidelines.
- Term – A term endowment means that the organization can use the principal or base investment after the stated amount of time or event. These run out over time, like an expiration date, and then become unrestricted funds.
- Quasi – In the simplest sense, a quasi endowment is one that is somewhat restricted and somewhat unrestricted. These are funds given with the intent of a specific purpose or goal. Usually, the principal is retained, but the earnings are utilized per the goal of the donation. These act like true endowments at times, but then after a period, the board can vote to restrict the funds.
In a 2020 ARTnews survey of fifty art museums, the breakdown of endowments was:
- 61 percent permanently restricted
- 20 percent temporarily restricted
- 19 percent unrestricted
It is important to note that the terms of a gift can be renegotiated and revisited. In 2020, for instance, the Worcester Art Museum contacted the trust of a deceased donor to request a change in terms. The donor had gifted about one quarter of the ninety-million-dollar endowment for art acquisitions. Working closely with the heirs and trust, the museum negotiated to temporarily redirect one million dollars in endowment income to support the museum’s operations (including salaries).
Your Role as Educator
As an educator, you play a crucial role in building these endowments with the vital work you do. It is your job to take on, in some capacity, fiduciary responsibility for your organization. Invite your fundraising team to try some of your activities or programs; they are some of the biggest boosters for the museum. The more information you give them, the better they can talk up the programs to current and potential donors. The more information they provide you, the better you will understand the financial situation of your institution. Ultimately, we are all on the same team.
Consider asking the following questions to play a more active role in the management and stewardship of financial capital (though be aware that what and how much an institution shares about its finances and investments varies drastically):
- How is the museum’s funding structured?
- Earned income, endowment, grants, annual giving…
- What is the endowment draw? While 5 percent is often cited as “the norm,” each institution decides its level. Does this change based on market performance or crisis?
- What is the endowment fund?
- Are there donor-restricted funds in the endowment?
- Are there board-restricted funds in the endowment?
- How is the endowment invested?
- What are the easiest projects to fundraise for? What is the hardest?
How Management of Finances Impacts the Educational Mission
Museum education departments rarely pay for themselves. The staffing, material, and promotion costs outpace anything reasonably charged to the general public. For this reason, education departments rely on endowments, gifts, sponsorships, and earned revenue for support (to name only a few sources). Education departments are also often in competition with other areas of operation for limited financial resources. This competition for resources, particularly in times of crisis, can lead to another method of fundraising: deaccessioning and the selling of collections and/or assets (e.g. land or buildings).
Deaccessioning and selling of collections frequently happen in the museum world, for many reasons (e.g., collection realignment, reinvestment in other areas of operation, building the endowment, and financial strain). The value of the objects and what the proceeds will be used for is often what makes news and causes concern. During the pandemic, the practice of selling collections to pay for costs other than acquisitions has become more prominent, and raised debate. On April 15, 2020, the Association of Art Museum Directors released a statement announcing that “AAMD will refrain from censuring or sanctioning any museum—or censuring, suspending or expelling any museum director—that decides to use restricted endowment funds, trusts, or donations for general operating expenses.” Museums of all sizes have taken or considered taking advantage of this temporary change.
Besides collections, another asset of value often held by historic sites is property (both land and buildings). An example of a museum looking to leverage property for operating funds is Old Salem Museum & Gardens. In the mid-1980s, the museum purchased new land to the west of the campus for an unrealized expansion, and has been in the process of selling the properties for decades. President & CEO Frank Vagnone is now looking to finalize that sale, as well as that of a warehouse that was once used for off-view activities and storage. He is hoping it will help channel money into the museum’s programming. “This land grab resulted in fewer funds for education and equitable pay for interpreters, etc. Everything is like a Calder mobile—one thing moves another—the education work was stressed by the expenses of acquisition of land and buildings,” he explains. The sales will get the property expense off the books and add funds to the preservation fund.
Vagnone highlights that the sales would grow the preservation fund to 3.6 million dollars and in ten years bring two hundred and fifty thousand dollars of income per year for maintenance and restoration efforts. Currently, restoration projects compete with other projects for operational funds. The sales will help right-size the organization, and “funding will be pulled back into the core mission of the visitor experience, education, and research.”
What happens when the asset you liquidate is your building? The Newseum in Washington, DC, found itself in this position, when its physical building became a financial albatross, leading it to shutter. The museum’s head of education, Barbara McCormack, says that the museum planned well for its physical closure, shedding its building but not its artifacts. “We see our artifacts and gallery assets as tools that we needed to transition to the digital world. We have broken them down into lego pieces that we have used to rebuild and create something new, and frankly, something better,” she says.
The education team at the Newseum had a few years to work on this transition, ensuring uninterrupted access for their constituents by bolstering the educational resources on newseumed.org. They have chosen to hold and amplify their collections for use not in one place but in community hubs and digitally nationwide, to ensure a long ladder of engagement for audiences near and far. “We do not want our vast collection in storage, but to go out into the communities instead of the communities coming to us,” McCormack says.
Talking about money and finances is never comfortable, but we all need to understand how our work is funded, particularly in times of financial strain. Some aspects of your institution’s financial health may be protected due to privacy, but that does not mean it should be a nebulous cloud we all leave to someone else to handle. This knowledge will reduce frustration over decision-making and help make museum educators part of the team adding to the financial health of the institution.