Introduction to Open-Economy Macroeconomicsecon.ucsb.edu/~lowell/191ac/Lecture Notes/Lecture 11...

Lecture 11 The economics of art museums Justifications for public support

Professor Julia Lowell [email protected]

Spring 2012

5/9/2012 1 Econ 191ac -- Lecture 11

Outline: Lecture 11

• About the midterm • The economics of art museums • Homeworks 8 & 10 and class project

discussion • Justifications for public support of

the arts • Homework 11 – due Monday 5/14

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ABOUT THE MIDTERM

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Midterm Question 1

1. (20 points) List the characteristics of a cultural good. Based on these characteristics, explain why you believe the following are or are not cultural goods:

a. A concert by the alternative rock band Coldplay, held at the Santa Barbara Bowl b. A gourmet four-course meal at Wolfgang Puck’s flagship restaurant in Los Angeles c. A bean and cheese burrito from a local lunch truck d. The Statue of Liberty in New York City harbor

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Midterm Question 2

2. (15 points) Tools for measuring the size and character of the arts audience include participation surveys, audience surveys, and personal consumption expenditure surveys.

a. You’re the President of the Board of the California Arts Council (CAC). You’d like to know the percentage of adult Californians that benefit from the various arts activities the CAC supports. You’d also like to know how big the arts sector is relative to other sectors of the California economy. Which of the tool or tools above will you use and why? Briefly describe some of the advantages and disadvantages of your choice.

b. You’re the Executive Director of a small municipal art museum. You have the opportunity to choose among several possible travelling exhibits to present at your museum, but you don’t know which ones will best capture the attention of your visitors. Which tool or tools will you use to find out and why? Briefly describe some of the advantages and disadvantages of your choice. 5/9/2012 Econ 191ac -- Lecture 11 5

Midterm Question 3

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3. (20 points) The diagram below depicts the demand, marginal revenue, average cost, and marginal cost for a regional theater company.

Midterm Question 3a

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a. (5 points) According to the diagram, what is the structure of the market in which this theater operates? How can you tell?

Midterm Question 3b

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b. (5 points) Briefly explain the shapes of each of the curves (that is, why is the demand curve downward sloping? Why is the marginal cost curve upward sloping? etc.)

Midterm Question 3c

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c. (5 points) Economists often assume that marginal cost curves are flat and close to zero when they model live performing arts companies. Why? What are the implications for average costs if marginal costs are flat?

Midterm Question 3d

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d. (5 points) If the theater company is for-profit, at which price/quantity point will it produce—A, B, C, D, or E? Where will it produce if it is a nonprofit?

Midterm Question 4

4. (10 points). List five features of complex creative industries (such as the film industry) that differ from “standard” industries. Explain the differences for two of them.

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THE ECONOMICS OF ART MUSEUMS -- CONTINUED

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What Do Art Museums Do?

• Collect and display art

• Educate the public

• Conserve art

• Conduct research

Unit of “output”: number of visitors per day. This relates to display function only.

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Issues In Setting Admission Fees

• Blockbuster exhibits – Crowding at popular exhibitions raises

marginal costs, justifying higher entrance fees

• Equity – No evidence that lowering admission fees

increases proportion of lower-income visitors

• Fiscal health – Revenues from stores & cafes sometimes equal

or surpass admissions revenues – Lowering the ticket price may boost revenues

from these unrelated business activities 5/9/2012 Econ 191ac -- Lecture 11 14

Sources of Revenue by Museum Type, 2006

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Sources of Government Revenue by Museum Type, 2006

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What Are An Art Museum’s Primary Assets?

• Buildings plus collections represent the primary assets of art museums – Yet up to 80% of many museum collections are

in storage

• Trade-off between adding gallery space and adding new works of art – Museum directors and boards like to buy art! – But also may be persuaded to fund a new wing

or even entire building (the “edifice” complex)

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Managing the Collection: The Issue of Deaccessioning

Why not “deaccession” some works? – Donors don’t like it – often impose legal

constraints – Uncertainty about future value of works in

storage – Negative reaction from public and press (don’t

want works held in warehouses in Beverly Hills or Tokyo)

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Managing the Collection: Strategies for Using Museum Assets More Efficiently

• Touring exhibits – SB Museum of Art gets loaner exhibit from the

Waters Museum in Baltimore

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• Touring exhibits • Franchising

– The Guggenheim has branches in NYC, Venice, Bilbao, Berlin, and Abu Dhabi

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• Touring exhibits • Franchising • Collection sharing

– Two museums alternate showing joint collection (this doesn’t happen much)

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• Touring exhibits • Franchising • Collection sharing • Big museums collect, small museums

display? – Small museums draw on collections of larger

museums – Focus on mounting exhibits relevant to

community

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Contributions vs Endowment vs Investment Income

• Contributions – Flow of cash or non-cash gifts received in the current tax

year – Not all payments from government are contributions—

nonprofits do contract work (after-school programs, commissioned art works, etc.), and loans ≠ grants

• Endowment – Stock of assets acquired through flow of contributions

over the years – Typically, organizations not allowed to touch the

principal (can’t sell assets, just earn income from them) • Investment income

– Catchall term for income derived from assets such as stocks, bonds, and non-exempt real estate

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A Note on “Single Organization Support” Organizations

• Many art museums and symphonies have dedicated fundraising arms – They are 501(c)(3) organizations – They often have the name “Friends of” or “Trust” or

sometimes “Foundation” (not usually “Inc”) tacked on to the end

• Fundraising orgs do not typically report program service revenue

– They usually have a lot of contributions – They often manage the art organization’s investments

• Money raised by fundraising arms shows up as large contributions in arts orgs’ revenue

– Can be misleading, as may actually come from small contributions to fundraising arm

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REVIEW OF HOMEWORKS 8 & 10 CLASS PROJECT

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Homework 8 (for Monday 4/30) (1) From your 4 remaining cities, identify

– 2 nonprofit art museum/cultural centers and – 2 nonprofit symphony orchestras (based on any combination of your 4 cities—can be 4 from the same city if you want!)

(2) Using guidestar.com, download the most recent IRS Form 990 for each of the 4 organizations (2009 or 2010)

(3) Based on the IRS 990 data, calculate – Total revenue – Earned income – Income contributed from the government – Income contributed from private sources

(4) Based on the IRS 990 data, who is the highest-paid employee and how much is he/she paid?

I will post instructions on navigating Guidestar and interpreting Form 990s on the class webpage. Note that these files are big, and may take a while to download. If you have any trouble, e-mail me – I may have some suggestions for making it easier.

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A Fabulous Example: Thanks, Megan!

NonProfit Art Museums/Cultural Centers/Symphony Orchestras Megan Sawamura Homework 8

Santa Monica

Museum of Art Albany Institute of

History & Art

Santa Barbara Symphony Orchestra

The Miami Symphony Orchestra

Year 2010 2010 2010 2010

Total Revenue 1,818,052 1,448,392 2,809,892 996,311 Earned Income 1,629,724 1,231,489 1,974,145 818,431 Income Contributed from the Gov't 120,176 343,383 20,740 92,817

Income Contributed from Private Sources 1,359,576 888,106 1,693,125 725,614 Highest Paid Employee Elsa Longhauser Christine Miles John Robinson Anna Craft Employee Position Executive Director Executive Director Executive Director Executive Director

Income of Employee 165,273 90,255 139,050 N/A

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Art Museum/Art Center Symphony Orchestra Other

Albany Institute of History & Art Anchorage Symphony Anchorage Museum Foundation

Anacortes Community & Youth Art Ann Arbor Symphony Orchestra Jeff Cooper Legacy Foundation (Tempe)

Baton Rouge Gallery Inc. Baton Rouge Symphony Association La Pena Cultural Center (Berkeley)

Berkeley Art Center Berkeley Symphony Orchestra Madrona: A Curriculum for the Arts Boise Art Museum Boise Philharmonic Association SB Maritime Museum

Boulder Museum of Contemporary Art Boulder Philharmonic Orchestra South Bay Quilters Guild (CA)

Carriage and Western Art Museum (SB) Cincinnati Symphony Orchestra The Guild of Artists and Artisans (MI)

Cleveland Museum of Art Civic Orchestra of Minneapolis Washington Center for the Performing Arts

Conejo Valley Art Museum (TO) Cleveland Philharmonic Whatcom Museum Foundation (Bellingham)

Huntington Beach Municipal Art Center Eugene Youth Symphonies Yakima Chamber Foundation

Larson Gallery Greater Miami Youth Symphony SB Historical Museum Miami Art Museum Miami Symphony Orchestra

Monarch Contemporary Art Center and Sculpture Park Minneapolis Pop Orchestra

Museum of Contemporary Art New Orleans Jazz Orchestra Museum of Russian Art New West Symphony (TO)

What You Found HW8: The Institutions (1)

What You Found HW8: The Institutions (2)

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Art Museum/Art Center Symphony Orchestra Nevada Museum of Art Orange Country Symphony

New Orleans Museum of Art Reno Philharmonic Association

Northwest Museum of Arts & Culture (Spokane) SB Chamber Orchestra Society

Oceanside Museum of Art SB Symphony Orchestra

Santa Monica Museum of Art Spokane Symphony

SB Museum of Art Tampa Bay Symphony

Sun Ten Museum, Inc. (Irvine) Thousand Oaks Philharmonic

Taft Museum of Art (Cincinnati) Torrance Symphony Association

Tampa Museum of Art Vancouver Symphony Orchestra

Thousand Oaks Regional Art Museum Waco Symphony

Western Gallery (Bellingham)

What You Found HW8: Compensation

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Institution Amount Highest compensation

SB Museum of Art Walker Art Center Cleveland Museum of Art

399,710 392,829 357,045

Lowest compensation Lots Not reported

What You Found HW8: Institutional Revenue

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Institution Amount Highest revenue institution Cleveland Museum of Art 78,046,094 Highest revenue symphony Cincinnati Symphony Orchestra 40,965,757 Lowest revenue institution

Thousand Oaks Regional Art Museum

15,115

Highest Public Contribution (%)

Torrance Symphony Vancouver Symphony

77% 62%

Lowest Public Contribution (%) Orange County Symphony

Tampa Bay Symphony Cincinnati Symphony (!) Boise Philharmonic

0%

Purpose of the IRS Form 990

5/9/2012 Econ 191ac -- Lecture 11 32 Source: Internal Revenue Service (IRS) Form 990 Instructions

Exempt orgs must prove that they are

eligible for exemption

Form also provides

information to the public

Example: FY 2008 Form 990 Hunter Museum of American Art (1)

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For many nonprofits, their operating name is different than the name they use for tax purposes

The Hunter Museum is a 501(c)(3) nonprofit

Example: Form 990 Part I Hunter Museum of American Art (2)

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This is directly mission-

related earned income

(nontaxable)

This is endowment

income (nontaxable)

This is other earned income such as rental

fees & café sales (may be taxable)

This is contributed

income (nontaxable)

This is unrelated business

income. It is taxable if

over $1000

Example: Form 990 Parts I & II Hunter Museum of American Art (3)

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Salaries

Fees for service,

advertising, insurance, art acquisition,

etc.

Example: Form 990 Part III Hunter Museum of American Art (4)

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This section is designed to (1) justify the organization’s mission and (2) show that it is

accomplishing its mission

Example: Form 990 Part III Hunter Museum of American Art (5)

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Again-This section is designed to (1) justify the organization’s mission and (2) show that it is

accomplishing its mission

Example: Form 990 Parts IV-VI Hunter Museum of American Art (6)

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• Part IV: Checklist of required schedules – Make sure the organization is filing all of the

information it needs to file • Part V: Statements regarding other IRS

filings and tax compliance – More about compliance with tax code

• Part VI: Governance, management, and disclosure – Asks questions about potential conflicts of

interest, structure of board, whistleblower policies, etc.

Example: Form 990 Part VII Hunter Museum of American Art (7)

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If this box is checked, the organization is basically

all-volunteer


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He probably works a lot

more than 40 hrs/week! This is the main guy.


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This can be a good place to look for

conflicts of interest

Example: Form 990 Part VIII Hunter Museum of American Art (10)

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A = B + C + D

This is nontaxable *contributed* income

(Part I, line 8) – column C should be

blank

This is directly mission-related

nontaxable earned income

(Part I, line 9) – Column C

should be blank


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A = B + C + D

This is investment income (part I, line 10)

plus other *earned* income (Part I, line 11)

– column C could be non-zero


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Oth

er R

even

ue

More other *earned* income (Part I, line 8)

– column C could easily be non-zero

A = B + C + D

Example: Form 990 Parts IX-X Hunter Museum of American Art (13)

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• Part IX: Statement of functional expenses – Allocates expenditures to different categories

• Part X: Balance sheet – Information about the museum’s assets and

liabilities at beginning and end of year

Example: Form 990 Schedule A Hunter Museum of American Art (14)

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This section provides a history of public

support in order to establish public charity

status

Example: Form 990 Schedule A Hunter Museum of American Art (15)

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These are the criteria for being

identified as a public charity

Example: Form 990 Schedules D & G Hunter Museum of American Art (16)

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• Schedule D: Supplemental financial statements – Provides details on donor-advised funds,

conservation easements, works of art etc. held as financial assets, endowments funds, etc.

• Schedule G: Fundraising or gaming activities – Provides details on fundraising efforts

Example: Form 990 Schedule J Hunter Museum of American Art (17)

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Indicates how the CEO/ED’s compensation is determined

Example: Form 990 Schedule J Hunter Museum of American Art (18)

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Details on the CEO/ED’s compensation package

Example: Form 990 Schedules K & G Hunter Museum of American Art (19)

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• Schedule D: Supplemental information on tax-exempt bonds

• Schedule O: Supplemental information to Form 990

• Financial statements – Stuff you usually find at the back of an Annual

Report

JUSTIFICATIONS FOR PUBLIC FUNDING OF THE ARTS 5/9/2012 Econ 191ac -- Lecture 11 52

Support for the Arts and Culture Can Mean…

• Paying more than you have to for a cultural event, activity or product (voluntary price discrimination)

• Giving money to a cultural organization

• Volunteering for a cultural organization

• Voting to allow your tax dollars—or someone else’s tax dollars!—be spent on the arts and culture (direct government support for the arts)

• Agreeing to allow other people to get tax breaks on their donations to cultural nonprofits (income tax deduction for charitable donations)

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Why Do It? Because…

• You (or someone you care about) benefit(s) directly from participating in the cultural event, activity, or organization

• The cultural event, activity, or organization benefits you (or someone you care about) indirectly by – Providing employment/stimulating economic growth – Acting as a source of pride/identity to your community

(social cohesion) – Teaching others about your community (cultural respect) – Preserving your heritage for future generations

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Private and Public Benefits of the Arts and Culture

• Private benefits accrue to individuals who participate in the arts as – artists – audiences and consumers – volunteers

• Public benefits accrue to entire communities – including those who are unable to participate or

who are simply uninterested in participating

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Intrinsic and Instrumental Benefits of the Arts and Culture

• Intrinsic benefits are inherent to the arts/culture experience – Always accrue to individuals, sometimes to communities – Often increase with level of participation – Are unique to the arts

• Instrumental benefits are by-products of the experience and are not inherent to the arts – Accrue at both individual and community levels – Non-arts activities such as sports, other economic

investments may provide similar benefits – May or may not increase with level of activity

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Framework for Understanding Benefits

Private benefit

Private benefit with public spillover

Public benefit

Improved test scores

Improved self-efficacy

Improved learning skills

Development of social capital

Jobs and economic growth

Expanded capacity for empathy

Cognitive growth

Creation of social bonds

Expression of communal meaning

Captivation

Pleasure

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Instrumental benefits

Intrinsic benefits

U.S. Federal, State and Local Governments Want to Create Benefits

BUT

• Don’t want to be seen as serving “special interests”

• Trust private markets to create private benefits

• Often trust private markets to create public benefits as well

Public benefit is a necessary but not sufficient requirement for government intervention

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HOMEWORK FOR MONDAY, 5/14

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Homework for Monday 5/14 (HW11a) Art Museum Economics

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Assume that, on its IRS Form 990, the NYC Metro Museum (“the Met”) reported: • 28 percent of its total revenue derived from contributions (one quarter of

contributed income was from public sources) • 50 percent derived from earnings on its endowment • 10 percent derived from admissions fees and membership dues • 8 percent derived from sales of merchandise, food, and beverages • 4 percent derived from all other activities a. How do these percentages compare to those reported for all US nonprofit

museums in the 2007 Economic Census? b. Give some possible reasons why, for certain categories of revenue, the

percentages reported by the Met differ quite a bit from those reported in the Economic Census.

c. Is the Met’s earned income plus endowment greater or less than its expenditures? How do you know?

d. Based on your answer to (c), should the Met’s Executive Director be worried about his organization’s long-term financial viability and ability to achieve its nonprofit mission? What other information could he collect that might help him decide whether he should be worried?

Class Project (HW11b) Homework for Monday 5/14

Find the following for your remaining 3 cities (examples here are for my hometown, Oakland, CA):

1. Federal, state, county and/or municipal art councils that fund cultural organizations and activities in the city. • NEA, NEH, California Arts Council, Alameda County Arts

Commission, City of Oakland Cultural Funding Program, City of Oakland Public Art Program

2. Private foundations that operate in your cities. What do they fund? • Open Circle Fndn, East Bay Community Fndn, Clorox

Company Fndn, etc.

Check National Assembly for State Arts Agencies, Americans for the Arts, FoundationFinder, etc. More helpful hints forthcoming on the class webpage.

5/9/2012 Econ 191ac -- Lecture 11 61

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