Deaccessioning as a singular event (updated again)

in debtThe Delaware Art Museum is planning on selling some works to pay off debt. The New York Times reports here, noting that “selling works to pay for operations or capital projects is widely considered an ethical violation, a betrayal of a museum’s role of holding art in public trust” (and see Art Law Blog here). The museum released a Q&A, and it is the very last question that interests me:

14. What will happen the next time the Museum needs money? I’m worried that the Board will look at the collection as a source of revenue.

It is our expectation that the elimination of the debt will put the Museum on solid financial ground for the foreseeable future. We do not support and cannot imagine any circumstance that would again justify the sale of art. This is a singular event.

And how do we know that? Well, we don’t. I do not know the details of the case beyond what has been reported today. The Museum Q&A says:

$24.8 million of tax-exempt bonds were issued in 2003 to finance the expansion and renovation of the Museum, which was completed in mid-2005. At the time of issue, the bond balance was expected to be paid in full by 2037. To date, the balance of the bond debt is $19.8 million after
several payments totaling $5 million were made from the Museum’s endowment over a period of time.

While the bonds were due in a lump sum in 2037, they are guaranteed via a bank letter of credit (LOC) that must be renewed every one to two years. The LOC is used to obtain the lowest interest rate and facilitate marketing of the bonds because investors rely on the credit of the issuing bank, rather than the Museum.

The global economic crisis gave way to much more restrictive banking regulations that caused significantly tightened credit standards. As a result, banks were forced to effectively accelerate the repayment. Simultaneously, the Museum’s endowment, much like others across the country, suffered a marked decline in the markets.

My earlier post on deaccessioning left the ‘ethical’ issue aside and looked at the problem as a governance one: permitting deaccessioning allows for less financially prudent management. So, again admitting I don’t have inside information, the museum borrows $25 million for capital projects in 2003. In 2014 it has paid off about $5 million of that. And clearly they don’t have the donors to make up the difference. It would be interesting to look back at the 2003 plan – how did they plan to repay the debt in the first place?

UPDATE: Sorry, one more flog at this dead horse. It’s all well to debate the ethics or rules of deaccessioning (see artsjournal blog neighbor CultureGrrl here, here, and here). But could we take a moment to look back at 2003, when the museum took on $25 million in debt. What was its plan? The Delaware Art Museum’s Q&A says this:

7. What is a bond debt, and why does the Delaware Art Museum have bond debt?

$24.8 million of tax-exempt bonds were issued in 2003 to finance the expansion and renovation of the Museum, which was completed in mid-2005. At the time of issue, the bond balance was expected to be paid in full by 2037. To date, the balance of the bond debt is $19.8 million after several payments totaling $5 million were made from the Museum’s endowment over a period of time.

8. How did this financial challenge arise? Didn’t the Museum forecast its ability to pay back the bond before it was issued?

While the bonds were due in a lump sum in 2037, they are guaranteed via a bank letter of credit (LOC) that must be renewed every one to two years. The LOC is used to obtain the lowest interest rate and facilitate marketing of the bonds because investors rely on the credit of the issuing bank, rather than the Museum.

The global economic crisis gave way to much more restrictive banking regulations that caused significantly tightened credit standards. As a result, banks were forced to effectively accelerate the repayment. Simultaneously, the Museum’s endowment, much like others across the country, suffered a marked decline in the markets.

9. Why can’t the Delaware Art Museum raise enough money to settle the bond debt?

The dynamics of philanthropy for the Museum and for non-profits across the country has changed dramatically over the past ten years due to the economic climate. While we have been able to maintain our base level of very generous donors, our donor base has not grown to allow us to cover higher operating costs. This requires that we rely more on our investment portfolio to fund shortfalls. We recently completed a campaign to celebrate the Museum’s 100th birthday. Our campaign raised $6.7 million, much of which came from our generous Board of Trustees. While this will allow us to grow our investment portfolio, it will not be sufficient to allow us to eliminate our debt.

So far all this seems to have been taken as a given, but it worth asking: what was the decision process that led to this issuance of debt, and what was the plan for financing it?

And if I can go from the specifics of this case to the general: in the news we focus on the crisis at hand, and what ought to be done. In this example, the debate is centered upon whether deaccessioning is an appropriate response to getting out of this sort of debt mess.

But the problems facing the DAM are not the fault of a natural disaster, or a ‘global economic crisis.’ In 2003 regrettable decisions were made. We like to give praise to a leader who can guide an arts organization through a crisis. But the effective arts administrator is one that puts in place policies that prevent crises from occurring. She won’t appear in the news so much, but that’s ok.

MORE UPDATE: March 31 Delaware Online looks into the situation in more reporting depth:

The [DAM] board’s recent action stems from the legacy of a $32.5 million expansion in 2005 that nearly took the museum under.

The three-year project essentially doubled the size of the Kentmere Parkway building, but was plagued with $8 million in cost overruns and delays.

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