Museums must rethink how they use their endowments – or they’ll struggle to rebuild after this crisis

A common argument in the present funding crisis facing museums, particularly in the US, has been: if museums are sitting on millions, and in some cases billions, how can they justify asking for more money while simultaneously selling their collections, creating redundancies, and cutting costs left, right and centre?

This argument is too readily cast aside by many museum leaders and trustees, who claim that people don’t understand that these endowments, pots of money built on decades of donations, are invested to provide a safe and secure source of earnings that can guarantee the future of institutions. And although it is hard to dispute this, we need to address the real problem with museum endowments: inflexibility.

Inflexibility has always been built into the fabric of museums, and much of it derives from the donors and benefactors themselves. In 1887, the philanthropist and collector Catharine Lorillard Wolfe bequeathed 140 paintings to the then-young Metropolitan Museum of Art, along with one of the museum’s first restricted endowments: $200,000 (about $5 million today) for the care of her works and future acquisitions. Since then, methods of giving have remained largely unchanged, meaning that, typically, the majority of endowment funds are restricted in some form.

But donor-imposed restrictions are not the full extent of this lack of flexibility. Traces of this can also be found in the ethos of many museums’ leadership and boards of trustees. When the 2008 global financial crisis hit hard in the United States, endowments, which were invested in the then crashing markets, were badly hit: the Guggenheim’s endowment, for example, fell by 18 per cent in 2009. In the aftermath of the crisis, philanthropy dried up, lay-offs occurred, and programmes were cancelled. But the hands of the museums’ leadership and board were tied by their own belief in a culture of preserving what was left and their anticipatory anxiety of not diminishing potential future earnings. The endowment, tied up in the crippled stock market, could do nothing to mitigate the losses.

Despite this, and in recent years, there has been a push in the US to expand endowments, and across the world to build them from scratch, seen by many as a direct response to decreasing state funding, particularly in the UK. Following a report on endowments written in 2010 by Neil MacGregor, then director of the British Museum, a government-backed joint match-funding initiative was created to help arts and heritage organisations build or develop endowment funds in the UK. In France, the Louvre museum launched its endowment in 2009, also a response to decreased state funding and to shield some of the funds received from the Louvre Abu Dhabi partnership.

Today, with the Covid-19 pandemic having a greater effect than 2008, institutions are largely holding fast. The arts, often thought of as an antidote to everyday life, are far from immune from the real-world concerns in times of crisis. News that the Metropolitan Museum of Art is dipping into its endowment to plug its $100 million shortfall is misleading if you take that to mean that museums are changing their tune. The Met director Max Hollein and CEO Daniel Weiss once again made sure to point out that drawing from the endowment today has to be measured against the resulting drop in returns tomorrow.

Until now, to preserve endowment values over the long term, museum boards and their investment committees have favoured endowment growth over current spending. This ‘endowment hoarding’ means that, while long-term capital fund growth over the last decades has averaged some 12 per cent and more, distributions to museum operations in the US are typically around 5 per cent of fund value, leaving the remainder to be reinvested.

Here is the first clear disconnect between endowments and the perceived ethos of museums. While it is undeniable that endowments cannot recurrently have their principal capital systematically depleted, there should be allowances in times of crisis to take as much as is feasible without compromising the long-term preservation of the fund as well as more adaptability when it comes to the restrictions of funds endowed, at least in the recent past. And if this does translate into slightly lower levels of drawing from endowments in the future, it is a small price to pay for maintaining institutions that exist for the public good. After all, it is hardly unprecedented for an endowment to be rebuilt. From 1999 to 2008, the endowment of the Museum of Contemporary Art in Los Angeles (MOCA) went from $42.7 million to $6 million due to financial mismanagement. But by 2013, it had built it back up to $100 million and before the pandemic, it was at $137 million. It is possible to rebuild endowments.

As the flaws in endowment strategies are being exposed, holding this line could have a serious impact on the reputation of institutions and could affect the future of giving. With the baby boomer generation starting to age, and one of the largest intergenerational transfers of wealth to Gen X and Millennials expected (calculated at $30 trillion in the US alone), it is likely that the days when donors would write a cheque or donate works in restricted perpetuity will disappear.

The newer generation of donors is demanding to see first-hand the impact of their support as well as transparency and accountability. This generation will not easily forgive a museum for mass redundancies of staff during the worst pandemic of their lifetime to date, and they will certainly remember the extent to which museums reacted to calls for social and racial justice. While the latter might seem distant from the question of endowments, in reality, these things are more interconnected than ever before. Hoarding money to the extent institutions have done will not be deemed to have been acceptable at a time when there was an urgent need for it – and may jeopardise future giving.

The traditional endowment culture simply is not designed for the particular needs of museums going forward. There is certainly more potential for flexibility than some deem possible, if only there was the institutional courage to pursue it. We have an opportunity to use endowments to address the real needs of today and to rebuild those funds, with a new focus, when the fundraising climate improves. A focus, that is, which encourages a new generation of donors and new, less restricted ways of giving, more in line with museums’ responsibilities now and in perpetuity.

Leslie Ramos is a fundraising and development consultant and founder of ArtEater, an independent philanthropy agency for the arts.