Raiding endowments

When we created the Pro-Life Union of Greater Philadephia‘s “John & Harriet Stanton Culture of Life Endowment,” we intentionally established it through the independent Catholic Foundation of Greater Philadelphia. At the time we did this, some board members asked, “Why not create it and manage it ourselves?” A great answer to this question came in the news last week. Peter Dobrin writes:

The Philadelphia Art Alliance, the venerable but long-struggling arts gem just off Rittenhouse Square, is to be absorbed by the University of the Arts under a deal approved by the boards of both groups.

The acquisition gives the university a gracious formal parlor a few blocks from its Broad Street campus in a neighborhood populated by many of the city’s most generous arts donors. The school expects to renovate the Art Alliance building, the former Wetherill mansion, and to establish a committee to help determine its long-term use, said University of the Arts president David Yager.

Its new name: Philadelphia Art Alliance at the University of the Arts. …

Established in 1915 as a small but ambitious artist-run arts center, the Art Alliance moved into the current Italian Renaissance-style building at 251 S. 18th St. in 1926. It traditionally presented the art of the day – often from opposite sides of the popularity spectrum. In the 1930s, it hosted Vladimir Horowitz and Nelson Eddy, Gertrude Stein, and Walt Disney (in 1932, in what was believed to be the first museum exhibition of animated art).

It was the venue, in 1936, for Andrew Wyeth’s first show. “I was 17. I was thrilled,” said Wyeth in 1989 upon accepting with son Jamie a shared Medal of Achievement from the Art Alliance. “I didn’t sell a thing.”

Horace Pippin was recognized in 1947 with a major exhibition. In the 1950s, the Art Alliance brought in W.H. Auden, Dorothy Parker, Aaron Copland, and Dylan Thomas. There, in the 1960s, Merce Cunningham danced and Edward Albee spoke.

Although the Art Alliance’s first significant shortfall came in 1969, according to its own written history, it continued to function as a locus for the arts community.

I had heard of the Philadelphia Art Alliance before, but wasn’t actively following them. Their trajectory tracks with Philadelphia’s waning prestige in the latter half of the 20th century, and in that sense their story isn’t unique. They’re one of many institutions that faded as people (and their money) moved away from the city. So how have they been surviving for so long?

Art Alliance board chair Carole Price Shanis said that keeping the books balanced had been difficult and that while the small arts center might have been able to keep going as it has, it would not have been able to realize its full potential.

“We’ve been in the black some years, and not so much reddish but pinkish in others, and when it’s been pinkish we’ve had to raise more money to make up the difference,” she said. …

The Art Alliance has been eating through its endowment, which was about $900,000 a few years ago, according to tax filings, but little is expected to be left by the time the deal is made final. “Clearly we needed an additional $150,000 a year in operating income to build this into a going concern,” said Thora Jacobson, the art club’s executive director.

After looking at their most recently available 2014 tax return, their contributions were roughly ~$115,000, and it looks like they made most of the rest of their revenue from renting the Wetherill Mansion where they’re headquartered. They made relatively small amounts from program revenue. The Philadelphia Art Alliance was cannibalizing its endowment to pay for its immediate expenses in order to avoid closure. Carole Price Shanis’s assertion that their budget wasn’t “so much reddish but pinkish” is a very charitable way to look at recent annual deficits of $70,000 and $250,000 in the past two years. I’m not criticizing the Philadelphia Art Alliance for eating its endowment to stay alive—I’m assuming that they did what they felt was necessary, and it was within their right to do so. But every time one dips into an endowment, that endowment’s capacity to generate annual income is diminished and its purpose as an endowment is compromised in providing for the organization’s mission. The moment that dipping into an endowment’s principal is necessary for a nonprofit to stay alive is the moment that trustees or directors should be looking to do what the Philadelphia Art Alliance ultimately did: reorganize or merge.

If the Philadelphia Art Alliance’s endowment had been protected through investment with an independent community foundation (like The Philadelphia Foundation), it arguably would’ve forced their board to make the same difficult decision much sooner—and instead of the University of the Arts getting the Wetherill Mansion, they’d also be receiving a $1MM endowment to fund a basic program budget.

At the Pro-Life Union, we intentionally created our endowment with the independent Catholic Foundation because it makes it impossible for any future Pro-Life Union board to “raid” the endowment’s principal to do what the Philadelphia Art Alliance did. If and when that moment of fiscal crisis comes for the Pro-Life Union, those endowment funds raised by generations of pro-life donors will be safe from being spent in the blink of an eye. Indeed, the John & Harriet Stanton Culture of Life Endowment is designed to outlive the Pro-Life Union, while at the same time continuing to perpetuate its mission by funding similar culture of life efforts in perpetuity.

The larger an endowment becomes, the more at-risk it is in being seized upon by the human tendency towards short-term thinking. I remember reading something that Peter Lynch once said: “invest in businesses any idiot could run, because someday one will.” That’s not a charitable way to think, but absorbing that principle can be a practical way to protect a nonprofit’s assets from the apparent necessity of misusing those assets in the future.

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