The Berkshire Museum’s operating deficits

The Berkshire Museum is still not getting back to me, sadly, but the museum did respond on Facebook to my last post about its financials:

The IRS form 990 does not differentiate between operating and non-operating revenues and expense. Such details are key for anyone who is trying to analyze the Museum’s (or any cultural or educational organization’s) financial position and operating results. The museum stands by its statements.

It’s true that the museum has been talking a lot about its “operating deficit” – a number which has indeed been more than $1 million a year since the 2009-10 fiscal year. So, what is an operating deficit?

If you look at the most recent audited financial statements, you’ll see that the museum’s revenue falls into three buckets. There’s “contributed income,” which includes government grants and membership revenue; there’s “earned income,” which includes admissions and museum store profits; and then there’s “non-operating items,” which includes capital donations, investment income, and endowment contributions.

When the museum talks about its operating deficit, it’s deliberately excluding all of those non-operating items from its calculation. And those can be substantial: in the 2013-14 fiscal year they totaled $2,486,135, while in 2014-15 they came to $2,285,275. It’s not clear why sums of this magnitude, even if they’re lumpy, should be ignored when looking at the sustainability of the institution.

What’s more, the distinction between operating and non-operating income was not always as key as the museum now claims that it is. In the years before the financial crisis, and before the museum sold off three paintings to create the Keep Crane fund, there was no non-operating items section in the audited financials. In 2007-8, for instance, some $3.6 million in donations to the capital campaign were listed under “contributed income”.

The following year, 2008-9, there was a new line showing $7,009,306 in “deaccession income,” separate from the contributed income and earned income. But it was only in the year ended June 2010 that the museum created a separate section of the income statement for non-operating items.

Certainly, if you’re responsible for any institution’s finances, you need to understand where the money is coming from. But ultimately what really matters is the bottom line. To fixate on an arbitrary measure of operating income, when a substantial amount of money is coming from non-operating income, only serves to make things look worse than they actually are.

Addendum for auction nerds:

One of the interesting things about the change in accounting protocols is to see what happened to $223,857 of “other earned income” in the 2008-9 fiscal year. Originally, all of it fell under “contributed income”. But when the accounts were restated the following year, “other earned income” was just $3,357, and there was a new line under “non-operating items” showing $220,500 in “buyer’s premium from sale of collection items”.

That was the year, of course, when Sotheby’s sold three of the museum’s paintings by Boris Dmitrievich Grigoriev, for a total of $8,083,500. Pipe Players sold for $3,218,500; Shepherd of the Hills sold for $3,722,500; and Man with Pipe sold for $1,142,500.

Those are not very round numbers, of course, and the reason is that Sotheby’s adds a “buyer’s premium” onto the auction prices. In 2008, that premium was 25% on the first $50,000 paid, 20% of the rest of the first $1 million, and 12% above $1 million.

If you know that, you can work out what the hammer prices were: $2.8 million for Pipe Players, $3.25 million for Shepherd of the Hills, and $950,000 for Man with Pipe. That’s a total hammer price of $7 million exactly, and $7 million is the amount that ended up going into the Keep Crane fund which was created to house the proceeds from the sale.

Normally, when you sell a work of art at auction, the auction house will charge you a “seller’s premium”: it will take some percentage of the hammer price for its troubles. If you’re a prime customer, however, you can normally negotiate that seller’s premium down to zero, and take home the hammer price in full.

This time, however, Sotheby’s went one further, and offered the Berkshire Museum something called “enhanced hammer”. The museum didn’t just get the $7 million hammer price, it also got $220,500 over and above that.

The Berkshire Museum, in other words, negotiated a deal with Sotheby’s where it would receive 103.15% of the hammer price, but it only put the first 100% into the Keep Crane fund. The $220,500 bonus ended up buried in its operating budget. At least until the accounts were restated.

Which only leaves one question: If the museum negotiated 3.15% enhanced hammer when it sold $8 million of art, how much do you think it has negotiated now that it’s selling more than $40 million of art?

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