Today’s Milwaukee Journal-Sentinel is reporting that the Milwaukee Public Museum’s former chief financial officer had been financing Museum operations by invading the Museum’s endowment. See, A. Lank and D. Umhoefer, Museum Fund Nearly Empty (May 26, 2005). As of August 2004, the endowment stood at about $4.7 million. It is now estimated to be somewhere between...
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$400,000 and $500,000. According to the Journal-Sentinel, the Museum had a policy of making 5% of the endowment available to the Museum annually. In governance parlance, the 5% number is referred to as the spending rate. Most experts would consider the 5% rate to be a prudent spending rate because such a rate, assuming historical rates of return, would result in the Museum’s endowment remaining intact so that it could provide continuous income support in perpetuity.
As a general rule, in the absence of specific statutory limitations, spending rates would be determined based on principles of prudence. Several states have explicitly set spending-rate restrictions. Specifically, Massachusetts law creates a presumption that appropriations of net appreciation in excess of 7% of value are imprudent. Rhode Island requires that fiduciaries take inflation into account, and Pennsylvania, a non-UMIFA state, has a "prudence rule" that uses a minimum of 2% and a maximum of 7% of the value of assets as its baseline for corporations that elect into the regime. The New York Attorney General has gone so far as to issue a detailed policy statement regarding endowment spending rates. UMIFA is the Uniform Management of Institutional Funds Act, which has been adopted by Wisconsin.
We will return to the endowment issue momentarily, but there is a critical point to be made at this time. When this story broke several weeks ago, Museum officials generally claimed surprise at the significant operating deficits. Yet, the Journal-Sentinel reports that the CFO informed Museum President, Michael Stafford about the endowment withdrawals in January. Mr. Stafford has referred to complex spreadsheets as one of the reasons he didn’t know what was going on with the Museum’s finances. The CFO’s reference to January undercuts any claims of surprise in April.
Now back to the endowment. The Journal-Sentinel article refers to the endowment as being held by a separate entity—the Friends of the Milwaukee Public Museum. This appears to be an incorrect statement unless there has been a merger. It appears that the Friends is the fundraising arm, and that it transfers amounts to the Milwaukee Public Museum Endowment Fund. The 2003 Form 990 for the Friends shows net assets of $433,050 as of August 31, 2003. The last available tax return for the Milwaukee Public Museum Endowment Fund (August 2002) shows net assets of $4,052,752. The tax return reports that $2.5 million of the total number is not subject to restrictions, with $370,269 subject to temporary restrictions and $1,133,976 permanently restricted.
Once again, those charged with oversight apparently fell down on the job. According to the Journal-Sentinel, the endowed funds were kept in the same accounts as the Museum’s other funds. It is inconceivable that restricted assets would be kept in a general operating account. Moreover, if the endowment funds were subject to a 5% spending rate, it would have made sense for there to be a limited number of transfers between the Endowment Fund and the Museum. We would have expected either an annual transfer or quarterly transfers of income. Consequently, there should have been a dual-signature requirement on the “checking” account so that the funds couldn’t simply be spent at will. We don’t know whether there was a dual signature requirement, but we doubt there was a meaningful one given the facts. Normally the argument against such a dual signature requirement is that it is inconvenient when attached to an operating account, but an endowment isn’t an operating account. There really was no reason for the Museum's CFO to have had checking-writing authority in the first place. The limited number of checks could have been signed by a designated Endowment Fund trustee or director (we don't know what the governing body is called).
Moreover, someone other than the CFO should have been doing monthly bank account reconciliation and noticed the unusual activity in the account. Again, we don’t know who was reviewing the monthly bank statements, but once again, it is hard to believe that there was an independent person involved in the process.
All of this assumes a checking account. Typically, the endowment would be held in equity securities and long-term bonds. This makes “accidental” withdrawals even more puzzling. It is one thing to write a check against a cash balance, it is quite another to first liquidate investment securities. And we do note that one set of financial statements we reviewed did offer the following presentation for the consolidated entities—with some abbreviation by us because of space limitations:
| <> | <> | 2003 | <> 2002 |
| <> | <> | <> | |
| Common Stocks | <><> | 767,264 | <> 709,644 |
| Mutual Funds | <><> | <> | |
| Artisan Funds Mid Cap Fund | <><> | 761,245 | <> 628,227 |
| Masters Select International Fund | <><> | 962,923 | <> 887,749 |
| Vanguard 100 Index Fund-Admiral | <><> | 2,531,515 | <> 2,264,613 |
| Baird Intermediate Bond Fund | <><> | 908,871 | <> 1,643,042 |
| <> | <> | <> | |
| <> | <> | 5,931,818 | <> 6,133,275 |
We have no idea how often the Milwaukee Public Museum Endowment Fund’s board met. However, one would hope that the board reviewed account balances at its meetings. Even if the board met only once a year—which given the size of the endowment—is quite conceivable, somebody should have been receiving monthly statements.
Just how out of touch is Mr. Stafford with reality? According to the Milwaukee Journal-Sentinel, Mr. Stafford has indicated that the Museum will institute policies and procedures to prevent such operational withdrawals from the endowment in the future. Well, not only is the proverbial horse out of the barn, but it has been hit by a Mack truck. What good are policies and procedures going to do now? Everybody always gets religion after the fact.
The Journal-Sentinel captions the discussion regarding the reasons for tapping the endowment as “Withdrawals defended.” There is simply no defense for operations people to have ready access to endowment and restricted funds, nor is there any excuse for those funds to be spent without a clear authorization from the board or trustees responsible for those funds. At one point in the Journal-Sentinel article, the authors indicate that the CFO said that no funds earmarked for specific purposes were tapped. While those would be restricted assets, a fund that simply provides for preservation of capital, with income to the Museum, is also a restricted fund. While we can't say for sure, it would appear that those more general types of restricted funds were tapped.
It is time for Wisconsin’s Attorney General to begin an investigation. We do note that the tax return for the Milwaukee Public Museum Endowment Fund explicitly states that “The Milwaukee Public Museum Endowment Fund was organized as a perpetual charitable trust for the benefit of the Milwaukee Public Museum, Inc. The Endowment Fund is operated exclusively for charitable, scientific, and educational purposes to foster and benefit the Museum,” arguably providing the Wisconsin Attorney General with jurisdiction.
Under the common law, a state’s attorney general is charged with protecting charitable assets. As a general matter, states have incorporated common law notions into attorneys general enforcement powers. Section 701.01 et.seq. of Chapter 701 of the Wisconsin Statutes defines a charitable trust, and under that definition, the Endowment Fund appears to be a charitable trust. Unfortunately, this section of the Wisconsin statutes is anything but clear in setting out the enforcement power of the Wisconsin Attorney General despite defining the attorney general as an “interested party” in any court proceeding. We would hope that the Wisconsin Attorney General would intervene nonetheless. Under the present circumstances, we find it highly unlikely that the Wisconsin Attorney General would seek personal liability given that the assets apparently were used to fund Museum operations (and not for personal benefit). However, an investigation would provide an independent look at this entire sad affair, as well as serve as a reminder that violating restrictions on charitable assets is serious.
It is not at all surprising that Museum leaders are seeking the assistance (read “bailout”) of the Greater Milwaukee Committee. This is one case where the investigation should not be relegated to “closed doors” meetings by business leaders. What has happened at the Milwaukee Public Museum represents a serious breach of public trust. There has been mismanagement and inadequate oversight. This needs a full and independent public investigation if the Museum is to have any hope of restoring its credibility with the public, particularly major financial supporters.
We aren’t even sure the Greater Milwaukee Committee can save the day. This is not a case of throwing a couple million dollars at a problem. While we aren’t experts in museum finance, we would bet an endowment in the neighborhood of $20 or $30 million is necessary—and even that is probably insufficient. After all, a 5% return on a $30 million endowment is only $1.5 million. That doesn’t even come close to covering existing operating deficits. Even it the Wisconsin Attorney General recovered the $4 or $5 million of endowment that is now apparently gone, that leaves a significant gap. And Mr. Stafford and others keep talking about new exhibits and traveling exhibitions that pay their own way. The Museum will need significant working and long-term capital to even get into that game. Mr. Stafford, if you didn’t realize it before, you should now: Mission and financing are NOT independent of each other, but inextricably linked. As the head person, your primary job is to make sure the financial resources are there to support the mission. That involves much more than just fundraising. Specifically, it means putting forth a financially realistic mission, managing assets, marketing the museum, running gift and rental operations on a profitable basis, and a whole host of other tasks. All of this requires someone who can read an income statement and balance sheet.
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