“Without margin, there is no mission.”
One might assume that because museums are non-profits, they are not interested in making a profit. Some might also assume that museums are primarily government funded and therefore are not in need of individual support. Both of these assumptions could not be further from the truth. In reality, museums, especially in the United States, have to be run like businesses. There are two major factors that differentiate museums from businesses however. One being the fact that their profits must be turned back over and invested into the museum’s mission, and the other being their wonderfully lucrative situation of being home to priceless artifacts and works of art, and not being required to pay taxes on it. Due to these implications museums must get creative when it comes to generating revenue. Or do they?
Museum revenue portfolios consist of four major buckets: earned revenue, contributed income, government funding, and endowments/investments/trusts. The combination of these four elements and the percentages of each vary depending on the museum, but is there an ideal museum revenue portfolio? If the pandemic has taught us anything, it is that earned revenue cannot be depended on. When museums shut their doors, they lose out on the admission fees, parking, gift shop, cafe, and other earned-revenue channels. When researching ways for museums to make money, the highlight was always on earned revenue. However, earned revenue is not reliable and diversifying museum revenue requires staff and resources that some museums do not have. For instance, for our group project we are redesigning an exhibit for the Balzekas Lithuanian History Museum. Sigita, the museum Director, informed us that many of the museum's members have not even attended the museum before but see the cultural significance of the museum, which is why they donate. This donor generosity was able to keep the museum afloat during the pandemic. In truth, it is wealthy people, either via direct donations, foundations or endowments, that fund museums, especially in the US, and therefore contributed income should be the primary source in the ideal museum portfolio. In addition, funded income, in some cases, can be turned into investment income that is not subject to capital gains taxes since museums are tax-exempt.
A lot of research I found was in favor of the revenue diversification strategy, where an equal balance between multiple income sources is suggested in order to promote financial stability. I argue that museums should center their portfolios around normative theory. “Normative theory suggests that nonprofits should concentrate on sources that are uniquely associated with the benefits to be afforded to a particular population group or groups. In other words, it recommends focus,” Beyond Sustainability: Identifying the Right Resource Mix for Growth. In the Whitney Museum's annual financial report for 2020-2021, they experienced a $39.3 million loss in earned revenue from 2020-2021, (Financial Statements and Report of Independent Certified Public Accountants: Whitney Museum of American Art). One would assume this would dramatically hurt their bottom line, but in reality their net assets went from $810,190,000 in 2020 to $867,076,000 in 2021, which is a $57 million increase in net assets. So despite losing over half of their ticket sales in 2021 compared to 2020, the museum also managed to have a higher net income during a pandemic year. This was primarily due to millions of dollars in contributions for programs and endowments along with net assets with donor restrictions for investment return. This is why it is integral for museums to have donor support, which requires focus, as the 80/20 rule applies to fundraising “with 80% of gifts usually coming from 20% of donors,” The Business Model of the Nonprofit Museum. Hence why it is so important for museums to have wealthy board members.
“Brian Ferriso, Director of the Portland Art Museum in Oregon, reached out to his board this summer as he faced furloughing or laying off more than 80 percent of his staff. One board member wrote a $400,000 check—enough to cover two weeks of payroll,” What Keeps U.S. Art Museums Running—and How Might the Pandemic Change That?. Unfortunately, this means that museums in less wealthy communities will suffer most. This is the ugly truth about economics, especially for employees, and why most museums, whether they are affluent or not, depend on volunteer staffing. Revenue (earned income) covers operating expenses, and most of those operating expenses can be tied up in payroll.
Another factor to consider is the appreciation of value in the collections held at museums. The acquisition of the art is tax free and the appreciation of the art becomes an implicit subsidy (untaxed capital gain). As Don Fullerton writes in Tax Policy Toward Art Museums, “Annual budgets of museums usually leave aside the value of art that is donated, since budgets are supposed to account only for dollar flows. These donations represent additional assets to museums, however, and so they are part of ‘economic’ income. This art also receives an implicit subsidy.” According to a 1988 study on 155 art museums done by the Association of Art Museum Directors, 8.9% of the total revenue was from the value of art donated and 27% (the highest percentage) was from contributed income. Clearly, donations in cash and art can keep a museum afloat.
Endowments, investments, and trusts also play a critical role in museum revenue. Although they provide the least amount of wiggle room, they account for a large chunk of museum revenue in an ideal portfolio. Endowment income can only be used for specific things (most of the time) like purchasing art or educational programs, which can lead to museums with large endowments still struggling to pay the bills. However, endowments are meant to be able to sustain the museum for 100 years if managed correctly and only dipped into 5% per year in order to guarantee an increase in the endowment due to interest (What Keeps U.S. Art Museums Running—and How Might the Pandemic Change That?). Investment income is dependent on the stock market and therefore can be unreliable in times of financial recession. This is another reason why some museum consultants really push diversification and focus on earned revenue; because they can control how earned revenue is spent.
There are many avenues to explore in terms of earned revenue. “In addition to the ‘bus trips and bake sales,’ money museums earn from people coming through the doors, earned revenue includes things like income from special events and museum rentals, parking fees, royalties, gift shop purchases, loans to other museums, and speaking honoraria,” (What Keeps U.S. Art Museums Running—and How Might the Pandemic Change That?). However, when museums are forced to close their doors this earned revenue cannot be counted on, which is why it is a volatile source of revenue. However, being able to spend earned revenue as you please is definitely an upside.
In Beyond Sustainability: Identifying the Right Resource Mix for Growth, written by Woods Bowman in 2017, he discusses the benefits of diversifying versus focusing and comes to the same conclusion as I have. He cites William Foster and Gail Fine and their review titled How Nonprofits Get Really Big, in which they come to the conclusion that “Out of 200,000 nonprofits that obtained exempt-status recognition since 1970, only 144 currently have at least $50 million in annual revenue. Most raise the bulk of their money from a single type of funding source, and “created professional organizations that were tailored to the needs of their primary funding sources.”’ He concludes that the right revenue mix might “comprise a single, well-suited source.” However, he also writes that “sources of income should correspond with the nature of benefits conferred on, or of interest to, the providers of those resources.” Therefore, if a small percentage of people are donating the most cash and the most art, sources of income are completely disproportionate to the communities museums embody and reflect. When staying profitable is the only way to keep the museum’s mission alive, is the ideal revenue portfolio a true reflection of the museum’s mission?
According to the Association of Art Museum Directors, “the museum’s mission – its collections, programs and scope of services – defines the context in which appropriate revenue-generating activities are initiated and the primary criterion by which they are measured,” (Revenue Generation: An Investment In The Public Service of Art Museums). This has a huge implication on corporate sponsorships. “The donors available to a museum depend to a good degree on dominant local industries and fortunes, which can be out of sync with audiences that are becoming more sensitive to the sources of museum funding. There is less appetite for money derived from certain industries, such as oil and gas—and pharmaceuticals, as members of the Sackler family’s failed reputations demonstrates (opioid crisis),” (What Keeps U.S. Art Museums Running—and How Might the Pandemic Change That?). As museums face this new reckoning brought on by the pandemic, the Black Lives Matter movement, and social changes, they are forced to find funding that is in line with their mission and become more visitor centered in their revenue approaches.
I am surprised by my own conclusions, however, I also expected there to be some discrepancy in my own values and beliefs and the economic truth. It may sound counterintuitive or even hypocritical to suggest a normative theory approach when diversity, equity, and anti-racism were the topic of my most recent blog post. Can museums focus on their top 20% of donors while also remaining true to their mission and reinvigorated sense of equity and inclusion? I believe they can. In my last blog post I suggested diversifying the board of trustees in museums to be more representative of the community in order to promote a mission of inclusion. There are wealthy people of all races and museums should be reaching out to more than just rich white old men. However, the key word here might be “rich,” as money is still the driving force behind any business model. Art and capitalism will forever be intertwined and museums have the unique responsibility of balancing their mission with their economic goals, and finding that balance results in the ideal revenue portfolio.
SOURCES
https://www.sothebysinstitute.com/news-and-events/news/the-business-model-of-the-nonprofit-museum
https://www.artnews.com/art-news/news/united-states-art-museum-financing-1234584930/
https://nonprofitquarterly.org/beyond-sustainability-identifying-the-right-resource-mix-for-growth/
“Tax Policy Toward Art Museums” by Don Fullerton
https://nonprofitquarterly.org/beyond-sustainability-identifying-the-right-resource-mix-for-growth/
https://aamd.org/sites/default/files/document/REVENUE%20GENERATION%2006_2007_clean.pdf