Reposted from The Wall Street Journal.

Not a Pretty Picture: Shuttered arts institutions will find a way out of this crisis. But it won't be easy. 

Though the medical impact of the coronavirus is of paramount concern, how both the arts and their institutional infrastructure cope with what’s ahead still matters. The sector is economically significant—we have the data on all those jobs created; on the new investment the arts attract to urban areas; and on those high-end cultural tourists seduced into spending more, staying longer and coming back again. The sector is also socially significant and is, at its core, the custodian of the world’s material and intangible culture. So how are things looking for it?

Challenging. The arts are premised on dense physical contact. Even the more private art forms like poetry now revel in readings and slams. But this is obviously off the agenda, and the sector has pretty well shut up shop.

Consequently, organizations are scrambling to boost their online presence. But very few of these have any prospect of a business model to support them, and even fewer have one that could remotely substitute for the loss of revenue for live performance or attendance, or that could make full use of the expensive physical infrastructure that was, until two weeks ago, an essential part of most institutions’ economic model and raison d’être.

Boards and management—sitting at their kitchen tables in endless pixelated teleconferences—are therefore trying to make sense of a landscape transforming daily. The provisional consensus seems to be that how arts organizations fare in the immediate future depends on one cluster of factors, but how they fare in the longer term may depend on a completely different set. Building a bridge from the reasonably well-defined short term to the very misty longer term is the challenge the sector faces.

There are three drivers to which all organizations are giving their attention in the short term. The first is their balance sheets—working capital, reserves, endowment and debt. Like businesses everywhere, they are quickly facing cash-flow problems. A 2018 report from SMU DataArts—the most recent and most authoritative information we have—found that the average U.S.-based arts organization has less than two months of working capital; the average orchestra some 15 days.

Generally, the longer you have been around and the bigger you are, the stronger your balance sheet—and the better placed you are to leverage it through (very low interest) borrowing. For example, the Metropolitan Museum of Art in New York, celebrating its 150th anniversary this year, has an endowment of several billion dollars. Smaller, hardscrabble organizations with meager endowments, less wealthy boards and little collateral for securing lines of credit are hitting a cash crunch much faster.

The second driver is the underlying business model, which in this context the arts sector views through two metrics: the ratio of earned income to contributed income—grants, donations, galas, etc.—and the ratio of fixed to variable costs. Performing-arts organizations are much more reliant on earned income in general and specifically on ticket income—the former is over 60% of total income as opposed to under 30% for museums. So in a crisis like this, the performing arts are hit much more quickly. There are exceptions: According to a report last week in the New York Times, the Tenement Museum in Lower Manhattan, which has a very high ratio of earned to contributed income, has already laid off 20% of its staff.

On the expenditure side, the higher your ratio of variable to fixed costs, the better you can manage your situation, as you can control a larger proportion of your expenses in the short term. Organizations with extensive real estate-related costs, absolutely and as a proportion of the total budget, are disadvantaged—the sector has been on a decades-long “physical infrastructure” binge—as are those with onerous labor agreements, for example larger symphony orchestras.

But the cuts that are easiest to make to alleviate fiscal stress in the short term—such as reduced non-protected staff—may not take institutions in the direction they need to head in the long term. Even setting aside the human cost in the gig economy, where curators and artists are on short-term contracts, and the vaunted responsibilities of arts institutions as civic anchors, the price of losing talent and institutional expertise can be considerable. Finding a defensible path between the cavalier and the sentimental; protecting the underlying assets for the long-term while living up to those aspirational value-statements on the website; and reaching a consensus between the hawks and the doves on the team is a—perhaps the—major short-term preoccupation.

The third driver is the capacity and willingness of stakeholders—boards, foundations, government—to fund short-term cash demands that can’t otherwise be met. It is unclear how quickly boards are acting. But foundations are moving to provide liquidity. Last Friday a coalition of over a dozen announced their “NYC Covid-19 Response and Impact Fund” of $75 million to provide general operating liquidity and interest-free loans to New York City cultural institutions with annual operating budgets of below $20 million. Similar initiatives will be announced and foundations around the country are relaxing conditions on grants already made. The sector is lobbying for earmarks in the current federal rescue package. Federal tax filing delays may also allow the deadline for donations reflected in the 2019 tax year (when many people will have had significant gains) to be extended.

So in the short term, the sector is trying to buy time by applying working capital; lobbying for easements of restricted funding; fundraising; and borrowing, as it did after 9/11 and in 2008. It knows the drill. But it needs to use that time wisely, which means it needs to see where it is heading in the longer term.

Crises accelerate trends already under way, and the sector has been grappling with changes in demographics, tastes and competitive demands on leisure time. People are looking for more informal experiences, and ones where they have greater agency, often mediated in some way by technology. These have all put the arts on notice. In response, the sector has progressed over the past two decades from sales and marketing to audience development to outreach to “engagement,” in increasingly expensive and ambitious attempts to remain relevant to a changing world. These moves have been encouraged heavily by funders, sympathetic to and supportive of the underlying ambitions of arts organizations but often frustrated by the sector’s slow progress. The cultural sector in general—and larger “legacy” institutions in particular—risk losing their collective grip on the philanthropic imagination and conscience when set alongside other social imperatives. (Tellingly, the NYC Covid-19 fund was created to benefit social-service organizations, too—and in the press release that sector was mentioned first.)

The crisis also raises entirely new scenarios that arts leaders are having to think through. One that is looming large is a lingering presence of the virus pending the availability of a vaccine. This raises the specter of reluctance, especially among older audiences, to attend social functions or enter crowded spaces; of younger audiences, eager to socialize and re-engage in person, looking for less formal, more interactive contexts; of nonessential international travel effectively off the agenda for a year or two, transforming for example cultural tourism and festivals.

Arts leaders and funders sufficiently clear-eyed to see the situation as it is and nimble enough to adapt will regard this moment as an opportunity to ease and accelerate transitions, to examine more critically the impediments to organizational agility, and to ensure that resources are ultimately focused on stewarding creativity and access to it—not simply supporting institutional superstructures. For everyone it is a profound threat to business as usual.

Adrian Ellis is a director of AEA Consulting and the chairman of the Global Cultural Districts Network.