Credit-Rating Your Local Museum

The Delaware Art Museum is planning to sell works, aiming to right its finances. (Photo by Leslie W. Kipp)

The Delaware Art Museum is planning to sell works, aiming to right its finances. (Photo by Leslie W. Kipp)

Former Los Angeles Museum of Contemporary Art Chief Curator Paul Schimmel has won praise from critics for his exhibitions, but you can’t eat praise. In 2012, Mr. Schimmel resigned and, in an op-ed article in the Los Angeles Times, L.A. MOCA trustee and art collector Eli Broad cast aside claims that Mr. Schimmel was fired but noted that “the museum has … curated a number of exhibitions that were costly and poorly attended, often exceeding $100 per visitor. In today’s economic environment, museums must be fiscally prudent and creative in presenting cost-effective, visually stimulating exhibitions that attract a broad audience.”

Museum visitors may judge institutions on the basis of their permanent collections, exhibitions and amenities, but the money people are more focused on generating revenues, cost containment and endowment asset allocation. “Broad was pretty up-front about it,” an official at a museum association noted. “Usually, that sort of thing isn’t said.”

There is more and more of this kind of talk these days as museums struggle to rein in costs and increase revenues. Standard & Poor’s wrote in a recent report that U.S. cultural institutions “still face budgetary, operational and fund-raising concerns,” although many “higher investment-grade organizations appear to be well positioned to manage these difficulties.”

The credit-rating agencies rate nonprofit cultural institutions on the basis of a series of factors, such as market position (its reputation locally, nationally and internationally, as well as its membership and attendance figures), operating performance, balance sheet (gifts, investment income and capital campaigns) and capital expenditures. In addition, an institution’s governance and management, debt structure and longer-term factors, such as expectations of future capital investments, are also evaluated.

Even five years after the end of the recession, quite a few museums and other cultural nonprofit institutions remain in financial distress.

One is the Detroit Institute of Arts, which faces problems it did not cause. Other museums are the authors of their own financial woes. The Delaware Art Museum in Wilmington in 2005 took out a $24.8 million loan in the form of tax-exempt bonds (to be repaid by 2037) in order to finance an ambitious $32.5 million doubling of the size of the museum’s building. (Part of the high price is attributable to $8 million in cost overruns, which led the museum to sue the Boston-based architect and engineering firms Ann Beha Architects Inc. and Ove Arup & Partners, respectively—an action that was settled out of court.) Moody’s Investors Services was asked to rate the museum in 2003, according to a spokeswoman for the museum, but “we elected to not have a rating issued. Because of this election, our agreement with the rating agency prohibits disclosure of the indicated rating.”

The building proved too ambitious for a museum with a $4 million operating budget. “You have to wonder: What were they thinking?” said Michael Rushton, the director of the arts administration programs at Indiana University.

“The credit-rating agencies and the banks all asked: ‘How are you going to repay your debt?’” said Mike Miller, the current chief executive officer at the Delaware Art Museum. “’And if you spend your endowment to repay it, how are you going to operate?’” In defense of the museum’s board and CEO at that time, he noted that museums all over the country were “going with big, new buildings. The markets were good, the interest rates rosy.”

Certainly, the museum board and management were not prepared for the 2008 financial crisis, when the museum’s endowment dropped from $33 million to $21 million. With an operating deficit of $1.6 million (40 percent of its operating budget), creditor Wells Fargo bank became concerned about the museum’s debt-to-earnings ratio and demanded a stepped-up level of repayment, which almost led to the museum’s closing. Most recently, the museum announced plans to sell $30 million in artworks from its collection in order to repay its loans and increase its endowment—a move that has brought condemnation from the Association of Art Museum Directors, whose rules require member institutions to spend proceeds from sales on the purchase of additional objects.

Other museums have found themselves in worse condition. In New York, the American Folk Art Museum and El Museo Del Barrio have been forced to make reductions.

But Standard & Poor’s found endowment growth at the Whitney Museum of American Art (“A,” “stable”) to be “steady,” and it also described its revenue sources as “diverse,” although the museum’s groundbreaking effort in establishing membership categories resulted in the museum being only “able to retain 30 percent of first-year members; greater retention in first-year members has historically resulted in continual membership at the museum and is something that management is focused on improving.”

The Boston Museum of Fine Arts, which took on a sizable amount of debt in recent years with the opening of two new wings (currently, $175 million of outstanding Series A-1 and A-2 variable-rate demand bonds that the institution has issued through the Massachusetts Health and Educational Facilities Authority), recently was affirmed by Moody’s in its Aa2 rating, its third-highest rating for institutions. Those bonds reach maturity in 2037, but bond holders could cash in early, which could cause the museum considerable financial stress since its ability to quickly monetize assets is restricted by donors when they made gifts to the institution. Bond holders would be more apt to cash out early if the museum’s credit rating and long-term forecast declines, so Moody’s determination that the museum’s outlook is stable is a matter of dollars and cents.