Community Meeting Notes: Capitalization for arts organizations managing collections or facilities

The following are notes taken at a meeting held on September 12, 2011, with organizational leaders, community members, subject-matter experts, and civic leaders to discuss how WPF should think about capitalization for arts groups managing collections or facilities. A similar conversation was held with another group to discuss capitalization related to audience-oriented arts organizations.

Individuals participated with the understanding that they were speaking without attribution, so participants' names are intentionally omitted from these notes.

Meeting Purpose and Questions

In 2009, WPF along with the Pew Charitable Trusts commissioned TDC of Boston to assess the financial condition of Philadelphia-area arts and culture organizations.  Among other things, the report found that 77 percent of all the cultural organizations studied were undercapitalized, meaning that they did not have the cash necessary to meet short- and long-term obligations, weather downturns in the external operating environment, and take advantage of opportunities to innovate. Since then, WPF staff has struggled with how to best address capitalization challenges in the sector.

In addition, the report advised us that an organization’s capitalization needs are informed, in part, by an organization’s business driver.  While most organizations have more than one business driver, often one is dominant.  Therefore we grouped our capitalization discussions by combining two business drivers, in this case, Facilities (organizations that require buildings or other extensive fixed assets) and Collections (organizations that need to plan for the long-term needs of collections, balanced with the needs of their audiences).

We invited representatives of arts organizations and financial technical assistance providers to discuss the following questions:  How can we develop an effective, consistent funding approach to help organizations become well-capitalized and more fiscally-sound?   What can we do beyond grants that would be useful to arts organizations?  What are your experiences–successful or unsuccessful—in trying to improve your balance sheets?

Major Points from the Discussion

Sustainability – harder to stay afloat and raise money each year. Large organizations often have trouble with change management. Funding for general operations going away at many foundations in favor of project support, with little to no administrative support. Very different priorities within the foundation community.

Reserves – building an endowment is a huge challenge, and operating funds still need to be raised each year. Endowments may not be appropriate for all organizations. There is confusion about different types of reserves—endowments, operating reserves, cash reserves, etc. Also a need for risk capital/innovation funds, particularly in a down economy when it is harder to take artistic risks.

Facilities – high fixed costs; many struggle with upkeep and/or upgrades. Challenge to utilize older buildings for modern needs, long term plans can be helpful.   Also, many leases are expiring and the increase in real estate costs, especially in Center City and Old City, may mean organizations cannot afford to stay in current location.

Collections – high fixed costs for maintaining collections; need for increased space is often an issue. Balance sheets for nonprofits with collections are different because the value of the facility is included, but not the value of the collection, which potentially can be monetized.

Depreciation – can be a staggering amount and causes annual budget issues.  Boards often do not understand depreciation; important for board members and artistic directors to understand why funding depreciation is so important.

Boards – need to be strong and sophisticated and understand that fundraising is relentless; strong finance committee is key to success.

Guidance to WPF

Provide Education – need to stress Foundation expectations to boards. Drive home importance of reserves and issues like the need to account for depreciation. Promote use of executive coaches, such as the program in Boston, particularly when an organization is changing – people sign up and talk strategy, not tactics.  Share data and lessons learned. Help us understand the marketplace; provide information on consumer behavior.

Convening/Coordination – assign strong organizations to mentor and teach weaker ones. Use WPF convening power to mix small and large organizations with like issues. National, smaller convenings are important.

Clear Communications – communicate Foundation expectations, make us do things we do not want to do, e.g., no grant unless XYZ in place.  When a requirement on a grant is made, an organization is required to listen.  Make sure the capitalization conversation makes it safe to be in a multiyear capitalization strategy, and that dialogue takes an organization as it is.  

Open to Change/Flexible - Foundation needs to be willing to hear the truth. Shift from grantee/grantor relationship to partners; receptivity to fund an emergency.

Suggestions For New Initiatives - Create a pool of money for risk and innovation.  Provide opportunities that allow organizations to generate new revenue. Provide loan guarantees. Support a consortium to provide back office support for small organizations. Promote a cooperative mentality to leverage use of existing facilities and resources. Help to keep organizations up-to-date on technology developments.