Berkshire Museum: 'Emergency overstated,' nonprofit expert says

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PITTSFIELD — The Berkshire Museum wouldn't need to sell some of its most prized works of art to remain operational if it grew its endowment by $4.5 million, according to an expert on nonprofits.

"I continue to believe that they have overstated how much of an emergency they are in," said Stephen C. Sheppard, "and I think there would exist a clear path to a sustainable, essentially status quo, outcome that would not require deaccession of the 40 artworks."

Sheppard, a professor of economics at Williams College and director of the Center for Creative Community Development, which studies nonprofits, said the museum could sustain itself on an endowment in the range of $11 million to $12 million, versus the $48.6 million fund the museum has planned by auctioning the artwork.

On a pro-bono basis, Sheppard analyzed eight years of Berkshire Museum financial documents for The Eagle to arrive at his conclusions. Sheppard studied the museum's audited annual financial statements, which tell the complete financial picture of the museum's fiscal health, whereas Form 990s don't offer such completeness and detail.

The museum has said it is facing an average $1.15 million annual "structural operating deficit" and that it will close within eight years without changes, which is why it plans to sell art and fund its "New Vision" plan.

"When you make the case for change, you should not try to blame it on a financial crisis, which I think they have done," Sheppard said.

Berkshire Museum Executive Director Van Shields rejected that idea.

"This structural gap has nothing to do with a larger vision," Shields said. "It has to do with the fact that there was a patronage model that has gone away."

What has hurt the museum is that longtime donors have died or relocated as businesses such as General Electric, KB Toys and Sabic have closed or left the area, Shields said.

DEFINING DEFICITS

Shields and the board of trustees say the institution faces a "structural operating deficit" that in the past 10 years has averaged about $1.15 million, a sum that includes an average of $500,000 in depreciation.

Gary Moynihan of Adelson & Co., the museum's auditor, said while the depreciation of its building and other items is not a cash loss, it must be accounted for nonetheless.

"That depreciation acts as a reserve for future repairs and capital replacements and needs to be considered as an expense of the museum when evaluating its financial performance and financial position," he said.

The term "structural operating deficit" is more commonly used by government leaders to describe when expenses exceed revenues averaged over a five- to seven-year business cycle, Sheppard said. The anticipation is the deficit will level off between fat and lean economic years, he said.

Shields said he understands the term has likely caused some confusion. But put another way, he said, the Berkshire Museum has an "insufficient endowment to support its operations."

Sheppard said he disagrees with museum leadership's assertion that it needs to add $40 million to its endowment.

"They have convinced themselves, or have been convinced by their consultants, that there is no financial downside to the new approach," Sheppard said, "and simultaneously that there is no other alternative when there clearly does seem to be one. Raising $4.5 million is almost certainly within the capability of Berkshire County and the museum. Not that it is `easy;' just completely doable."

NEW VISION PLAN

The museum's $60 million New Vision plan would change that, museum leadership has said.

Approved by trustees hours before it was announced in July, the plan calls for at least a $40 million boost to its endowment and $20 million to renovate museum building on South Street. Museum leadership has said it plans to focus more on science and natural history and less on art.

The New Vision plan would mostly be funded by selling 40 artworks, a controversial move in the museum world. Many ethics guidelines for professional museum organizations state deaccession funds should be used to buy more art or improve collections. The trustees started studying the idea of deaccessioning in 2015.

The Berkshire Museum hopes to clear at least $50 million when the 40 artworks on its list, mainly paintings, go up for auction at Sotheby's later this year and into next.

The list, including two paintings by Norman Rockwell, has been regarded by art experts as a who's who of 18th, 19th, and 20th century American and European painters.

Earlier this summer, the museum launched a $10 million fundraising campaign toward the building renovation. About $5 million in pledges already have been received.

A fundraising campaign launched in 2006 took in $9 million.

Sheppard acknowledged the museum could also carry out a smaller level of deaccessioning, as it did in 2008 when it sold three Russian paintings for $7 million.

The museum uses its endowment, presently valued at $8.6 million, to plug deficits in years it runs them and that pool of money is running low, according to museum leadership.

When donations and other revenues come up short of their goals, the museum relies on its endowment.

It drew 34 percent from its endowment in fiscal 2016, according to Carol Bosco Baumann, the museum's public relations spokeswoman.

From fiscal years 2010 to 2016, the museum's total investments declined, "averaging about a $205,000 loss per year over that period," according to Sheppard. "They are correct to say that this is not sustainable, but they are not correct to say that they need to sell 40 of their `crown jewels' to solve the problem."

Moving forward, museum leaders plan to draw an annual 5 percent return from the $48.6 million endowment, allowing for a "sustainable, long-term position," said Moynihan, of Adelson & Co.

"They are just bleeding their endowment to maintain" as the museum averages an annual cash loss of $827,000, Moynihan said. "Which is just about what they have been drawing from their endowment annually."

Its New Vision business model is "armored," Shields said, and accounts for market fluctuations that could impact the return on its investment.

"We planned the business model in a way that it will work no matter what," he said.

INCOME SOURCES

But a larger endowment would not address what one financial expert points to as a cause of instability at Berkshire Museum, said Sharon Gregory, of Great Barrington, who also has looked at the museum's financials.

Gregory has extensive corporate finance and strategic planning expertise, having worked for PaineWebber, Lehman Brothers and Citibank, among others. Now retired, she also has served as trustee on a number of nonprofit boards in New York City and the Berkshires.

Gregory said that museum leadership should work harder to generate income, particularly from memberships, donations, program revenues, museum store sales, and rentals.

"Management has not demonstrated the ability to deliver programs or contributions [or] grants given the enormous treasure trove of art in the museum," she said.

The museum has about 2,300 pieces of "fine art" among its collection of 40,000 objects.

"To me, the financials leave room for developing other solutions, including more effective management in art-centric programming, integrating art with natural sciences and history, of which ours is especially rich," she said.

She also found fault with museum leadership's planned renovation of the building.

"There does not appear to be any quantitative data that would show more visitors would come or more contributions would be received with these changes," Gregory said. And that information is vital to understanding "the financial returns of the change."

Museum leadership has said its New Vision business model used "flat" projections and does not rely on increased visitorship or contributions, although either would be welcomed.

PAST ATTEMPTS

This is not the first time that Berkshire Museum trustees have attempted to course correct financially, said Elizabeth "Buzz" McGraw, the trustees president who joined the group in 2008.

"There were Band-Aids," she said, and among those was its 2006 fundraising campaign.

"There was a belief that someone would die and leave us $10 million," she said.

McGraw and Shields said the museum will continue to seek donations, but it will no longer ask donors to "plug the hole in the bucket."

"They want to support an institution that is fiscally responsible and that has a good business plan," Shields said. "Now we are saying when we come to you and ask you for money, it is going to make magic happen."

Last month, the museum turned down a $1 million offer by an anonymous group seeking to delay the controversial deaccession so experts could offer a second opinion. The Eagle also reported last week that at least two other groups floated proposals to the museum; one was rejected and the other was apparently ignored.

Reach staff writer Carrie Saldo at 413-496-6221 or @carriesaldo.

These are Berkshire Museum's financial statements documents, from 2002 to the fiscal year ending June 30, 2016, as prepared by its independent auditor, Adelson & Company PC. The documents include an auditor's report and statements on finances, cash flow, and expenses, among other things.

Berkshire Museum FY2002_FY2006 by The Berkshire Eagle on Scribd


Berkshire Museum Financial Reports Fiscal Years 2007 - 2011 by The Berkshire Eagle on Scribd


Berkshire Museum Financial Reports Fiscal Years 2012 - 2016 by The Berkshire Eagle on Scribd


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