Reposted from The Art Newspaper on Forbes

In June 2001, The Art Newspaper headlined an article that I wrote titled “Museum boom will be followed by bust.” The assertion was more controversial then than now. The long period of growth in activities and facilities in the 1990s was not matched by a commensurate growth in net assets–that is, in organizations’ balance sheets.

Indeed the nominal value of assets on museums’ balance sheets is often misleading. Investment in the sector – for example, in new galleries – is effectively overstated on the books in the absence of any secondary market in second-hand museum extensions on which the nominal value could be realized if it came to the crunch. And in those instances where collections are capitalized, then the stated value is only realized at considerable risk to the standing of the institution.

The few institutions that have used their collections as collateral to generate liquidity, like the Milwaukee Art Museum, have run into trouble when what they have assumed to be a cash-flow problem turns out to be to a cash problem. By the time the market peaked in April 2000, museums, a bit like dot-coms, were an overextended and undercapitalized sector of the economy, vulnerable to small changes in the balance between net income and net expenditure.

Museums have, in the event, experienced large adverse changes in income and expenditure. This has become known in philanthropic circles as the “perfect storm” in which endowment income, corporate sponsorship, foundation grants, public funding from tax revenue, individual philanthropy and visitor numbers (and therefore ticket income and ancillary earned income) have all decreased, while costs have increased. Three sets of costs in particular have risen:

• First, the cost of running museum buildings has swollen as a result of the physical expansions themselves. This cost-push continues to filter through today because of the number of projects in the long pipeline associated with capital projects in general and capital projects in the cultural sector in particular.
• Second, insurance and other costs associated with traveling exhibitions have skyrocketed. Museums’ insurance premiums have increased between 50% and 100% in the geo-political aftermath of Sept. 11, 2001.
• Third, ancillary programming, particularly in such areas as education and related outreach, have all grown as museums’ social agendas have expanded. The Institute of Museum and Library Services recently reported, for example, that the median museum expenditure on K-12 educational programs increased from 3% to 12% of operating budgets between 1996 and 2001.

Boards and staff are responding as best they can. In the short term, they are:

• Canceling, downsizing or, where they are early enough in the process, delaying expansion plans (for example, the proposed Frank Gehry-designed building in New York for the Guggenheim, Los Angeles County Museum, Los Angeles Children’s Museum, Chicago Art Institute, Boston Museum of Fine Arts, Denver Art Museum).
• Scaling back exhibition plans and, on the margin, making safer choices (Fine Arts Museums of San Francisco and San Francisco Museum of Modern Art).
• Freezing recruitment and laying off staff (Detroit Institute of Art, Guggenheim again, Carnegie Museum Pittsburgh).

All this is a rational and pragmatic short-term response to hard times, and for many it will be enough. The most insulated are those that have reserves into which they can dip–that is, “board-designated” funds that are not legally circumscribed by the donors’ intentions. Also protected are those that have boards that can position their institutions effectively vis-à-vis private and public funders, so that their operational losses are, in effect, underwritten. These two categories include the “premier division” that includes the Getty, the Met, Philadelphia, Cleveland, New York’s Museum of Modern Art and the Art Institute of Chicago.

But many of the 3,000 or so registered museums in the U.S. are not in this privileged position – and most macroeconomic forecasters believe the current squeeze is set to last for two to three years. It is a long time to hold your breath. The instinct of most institutions is to try to accommodate tough times by shaving a little off everywhere. It is equitable, and it does not require one to make difficult choices about priorities. This works well for minor adjustments, particularly where there is clearly “fat” to be squeezed out. But administrative liposuction works less well if museums are already fairly lean–at least in terms of staffing – and where more than incremental adjustments are required.

One risks creating a sort of “living dead” institution, in which variable costs (programs, exhibitions etc.) have been squeezed disproportionately because fixed costs are, just that, fixed. Many museums in the sector are therefore going to need to take more radical steps if they are to thrive rather than simply survive in some semi-inert limbo, the usual nonprofit alternative to actually closing the doors. The question is, of course, What sorts of steps?

Prescriptions for a sector that is as varied in mission, scale, audience, donor and user base and financial circumstance risk being generalized to the point of banality or of widely varying relevance. But here goes:

Museums need to take an informed and realistic view as to the most likely scenario they will face with respect to trends in their contributed and earned income and plan around that scenario, rather than the invariably more upbeat accounts they use for fundraising and other promotional purposes. Planning and bidding are, alas, not the same thing, and if you succumb to your own rhetoric you will be planning on a false prospectus.

Those that see, realistically, grounds for believing that resources are going to be constant or declining are going to have to face up to the possibility of doing fewer things but doing them better, concentrating on what they believe to be their core areas and stripping away accretions of responsibility accumulated in response to historic funding opportunities.

Stewardship, scholarship, collecting and outreach to the formal and informal educational sectors – various forms of social engagement all require different skills and resources. Can all institutions cover all bases and afford them equal priority? The fact that choices are difficult does not mean that they are impossible.

In order to downscale to a level where they can be effective in core areas, the process by which the balance between mission and market is struck needs to be articulated clearly internally, and to funders, visitors and users, so that cuts and reallocations are not perceived as arbitrary flailing. Radical adjustments take a lot of pre-selling in the politicized environment in which museums operate.

Funders in turn need to be – and are slowly becoming–much more aware of the current pressure on the sector and sympathetic to the need to focus. They are still inadvertently encouraging under-funded expansion through capital grants and many more “innovative” funding programs that cover the variable costs but not the fixed costs of new activities – ”coercive philanthropy,” in director and educator Robert Brustein’s evocative phrase.

Earned income strategies also need to be better grounded. It is difficult to make money without underlying assets that have a commercially exploitable value (intellectual or physical property), the resources to invest in its development and the ability to apply relevant entrepreneurial skills. All three are needed. Better not to enter the game than to enter it hobbled.

Contributed income – primarily from individuals – is and will remain the principal fuel for most traditional museums in the U.S.

There is, at its simplest, no alternative to long-term cultivation of donors who have the capacity to give or get and who are enthused by the mission, values and activities of the institution. Museums that have worked out how to do this and, more important, have the stamina to stick at it, will fare significantly better than those who do not. No amount of displacement theorizing or hand-wringing will make this highly unoriginal observation any less true.