For artistic directors and executive directors and heads of boards and other leaders and stakeholders in the nonprofit arts world, there must be nothing more charming than waking up in the morning unsafe in the knowledge that one’s budget is being slashed because one’s endowment is down being told by James Panero, at the reliably conservative Forbes magazine, that’s it’s your own damn fault.
The reductions in arts endowments reported over the past year have been significant, raising the question of how they have been managed. If the investment goal of arts endowments is the preservation of capital, how can they now face decreases of 35%, aside from the criminal actions of investors like Bernard Madoff?
For the answer, look to nonprofit money managers and “managers of managers,” such as the Commonfund, which was started with seed money from the Ford Foundation in 1969 and now manages managers for hundreds of nonprofit institutions, with $40 billion in assets under management as of 2007. These managers, now used throughout the nonprofit world, have encouraged arts organizations to seek “total returns,” including capital appreciation, from their endowments, rather than merely preserving capital and accruing dividend income.
So far, so good, right? Reading further into Panero’s piece, this is all pretty factual. Anyone can research any group’s 990s to understand, as Panero quotes from a 2005 Commonfund report, that “If you aim to get the most out of your investments long term, you have to own some that have a higher degree of risk.” And, indeed, as Panero writes, if this strategy “paid luxuriantly during the good times, resulting in bloated budgets and massive expansions,” arts groups “proved too slow to navigate away from the hazardous investments once the bad times began.”
In short, he writes, “arts organizations adopted bad habits.”
Panero goes on to cite perhaps the most glaring example of what happens when endowments invested in higher-risk situations have them blow up in the organization’s face: the Metropolitan Museum of Art. As confirmed by this week’s story in the New Yorker on Thomas Campbell, the Met’s new director, the grand institution is presently looking not so grand: its endowment is down $700 million since June 2008, or about a 25% decrease. Hence the budget freeze and a lot of layoffs and who knows what else. The Brooklyn Museum, Panero reports, has suffered even more: its endowment fell 35% to $65 million (a surprisingly low figure, it seems to me, for an institute of that size). Panero also recapitulates well-told tales of similar situations at the Metropolitan Opera and the City Opera, the latter being perhaps the worst case of institutional and economic mismanagement in recent years in New York City.
But where are the details on the heightened risks of these institutions’ investments? Indeed, what specific investments and which specific investment advisors are involved? Here Panero’s tale suddenly becomes thinner. Instead, he offers a quote from, and comments on, Peter Singer’s The Life You Can Save: Acting Now to End World Poverty:
“Philanthropy for the arts or for cultural activities is, in a world like this one, morally dubious.” Singer points to the $45 million that the Metropolitan Museum spent on a Duccio painting in 2004 as an amount that would pay for cataract operations for nearly 1 million blind people in the developing world. “If the museum were on fire, would anyone think it right to save the Duccio from the flames, rather than a child?” Singer asks.
All right, all right, it sounds as if I’m building a case that Panero didn’t speak to the other side — didn’t provide a chance for arts advocates to articulate why a Duccio painting is as important, or better yet, shouldn’t be compared to, one million cataract operations. So Panero goes to Randall Bourscheidt, president of Alliance for the Arts, who says:
“Helping an arts organization? That’s a tougher sell… [the] deeper values of society that are in education and the arts are important… These activities are not competing with basic needs but complementing them.”
Well, no, not really. Can you really say that paying $45 million for a Duccio painting is pointless if one million people requiring cataract operations can’t see it? If the Met’s benefactors ponied up so that the museum could afford to buy such a painting, and if that painting can ultimately be seen by, say, 100 million people, couldn’t one equally amortize the value of the painting in that sense as well? I mean, $45 million could also pay for kidney transplants and artificial hearts and malaria vaccines and prenatal care and a fabulous triplex on Park and 81st Street. But absolutely none of these comparisons are really the equivalent of art. And Bourscheidt should have said that: He missed an opportunity to decouple Panero from one of the thrusts of his argument — that arts organizations ought to be looking inward and blaming themselves singularly for their economic predicaments.
Arts managers are not investment managers — if they were, they wouldn’t be arts managers. Fiscal advisors made calls based on prior performance and no guarantees of future performance, that’s true. But they also — and Panero does cite Bernard Madoff in his story — did upsell arts organizations on halcyon promises of rosy futures. Yes, it’s incumbent on any organization to take the ultimate responsibility for how their endowments are invested. But this idea that Panero is advancing that somehow rogue executive directors spent time diving into the riskiest ventures possible is just out of touch with the day to day reality of what these people, or their boards, actually do. Everyone deserves blame, not just arts organizations.
Perhaps Panero might next look at the Forbes readership and assess how many of his readers provided information — and spin — that got some of cited groups into trouble. I mean, it’s not as if investment managers are relinquishing their commissions, right? If they did, after all, they wouldn’t be competing against museums for art being sold in auctions.