Insights

Warning: Earned Income Can Be Bad For Museum Health

from The Art Newspaper
December 2005
By Maxwell Anderson

The membrane separating art museums from commercial instincts has never been more porous. There are some cogent arguments to celebrate this new age. The robust attendance of recent years is largely attributable to blockbuster shows, which museums stage to keep their institutions in the public eye. Earned income realized from these projects can make for year-end reports full of robust statistics, sometimes translated into economic impact studies. The gross receipts from tickets, merchandising, food and beverage sales, rental events, memberships, and other earned income sources can give the impression that a museum is not only sustaining itself, but thriving. They can even give rise to the misleading impression that museums may not need subsidies.

The net income from shows, however, is rarely reported. After factoring in the percentage of staff salaries allocated to mounting exhibitions, along with unsold merchandise, wear and tear on facilities, and the opportunity cost of neglecting the permanent collection, research, education, and back-of-the-house functions, the picture is often less rosy. Museums with big collections, big endowments, and big tourist markets can usually manage both their core mission and big shows – and possibly even net a surplus – but midsize and smaller museums often end up scratching their heads in year-end accounting once the debris of the occasional spectacle is swept up. Nevertheless, it is often the number of bodies through the door, not the net return from admissions income, let alone the quality of the offer, which earns approval.

American museums are ratcheting up their commercial activities, raising admissions fees, expanding shops and restaurants, and increasing attention to rental events and corporate partnerships. Museums aspire to being seen as commercially intrepid, but the fact is that they could not survive without the huge subsidies they enjoy from individual giving, in turn encouraged by tax-exemption, which will result in a $40 billion tax subsidy across all charitable sectors this year. European museums are shifting away from state funding and towards earned income. But in doing so they lack the support relied on so heavily by their American peers: most U.S. art museum income comes from private donations by generous, wealthy patrons, and not from business activities.

As European ministries look to craft new incentives for individual philanthropy modeled on the U.S. system, conservative American lawmakers are pursuing the elimination or drastic reduction of both tax exemption and the estate tax – the vehicle that has benefited charities throughout the United States for decades by making the transfer of wealth from individuals to a next generation easier if enough of it is passed onto a so-called 501(c)(3) organisation, one deemed charitable in purpose. In a pincer move, the U.S. Congress and the Internal Revenue Service are simultaneously investigating reported excesses and abuses among non-profit organizations, one result of which may be to reduce their implied burden on the Treasury by broadening application of the Unrelated Business Income Tax (UBIT), a tax on income realized through non-educational initiatives. While this effort has been slowed by the costs of the Iraq War and Hurricane Katrina, if it regains momentum it would lead to reduced benefits for those making gifts of cash and art to museums, and thus to reductions in contributed income.

Numerous European museums are being given what at first seems like an opportunity: keeping their ticket sales in exchange for a reduced annual subsidy from government. By shifting from the public purse to purses of the public, there is an intuitive improvement: lessened bureaucracy and an opportunity to tailor offerings to the audiences who make use of museums.

But the price can be considerable: lessened pressure on museums to explore ways of serving non-traditional audiences, increased pressure to stage exhibitions and events that privilege mass appeal over educational value, and erosion of commitment to the expensive core activities of museums: conservation, documentation, publication, and education. If “Star Wars”, Armani retrospectives, and for-profit shows like Tut II become the rule, it will be harder still to argue on behalf of tax-exempt status.

Nevertheless, a reduction in public funding, and with it a reduction in public accountability, is pushing museums towards a market paradigm, a sink-or-swim mentality based on maximizing earned income, as sources for contributed income shrink. A key economic question for those advocating the shift from public funding to transactional funding is this: how efficient can art museums become as they shift to an attractions-focused model?

Here's one crude way to measure efficiency. Divide a museum's operating costs by its number of visitors. The Louvre's annual operating budget is around €150 million, and it attracts some 6 million visitors a year. This results in a notional per-visitor cost at the low end – around €25 per person. Yet a normal ticket costs €8.50. Furthermore, school groups, discount pass holders, members, and tour groups drive up the number of free or heavily discounted attendees – as many as 40-50% of museumgoers can avoid the full-fare ticket at many museums. So per-visitor income is in fact lower than such simple arithmetic may suggest.

Thus there is a basic dilemma to suggesting that earned income can keep a museum afloat: it would have to extract dozens of pounds per person to get it on a sensible commercial footing. Yet the more adventurous museums are in pursuing commercial opportunities, the faster lawmakers will reduce public subsidies and tax advantages for philanthropic support. So we face the emergence of a two-tier system of haves and have-nots. The museums in the biggest markets with the largest collections and endowments will make their way with less difficulty. The rest will eventually have to alter their business model or merge as income shrinks and costs rise. The best way forward for art museums on both sides of the Atlantic is to create compelling experiences in permanent collections and more modest exhibitions, encourage public and philanthropic arts support, and stage blockbusters only when the return on investment is worth it – both financially and artistically.