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We apologize to our readers. We predicted a large overview piece would appear in Sunday’s Milwaukee Journal-Sentinel that would explore the Milwaukee Public Museum’s finances. Recall that last week, the Journal-Sentinel reported that the Milwaukee Public Museum had disclosed the possibility of a $4.1 million operating deficit for its 2004 fiscal year, almost ten times larger than the $447,000 operating deficit that had been previously indicated.
But....
| Our Guide, Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer, focuses heavily on the board's role in financial reporting. You should buy a copy of our Guide today. Call us at 773-325-2124 for additional information, or visit our website at http://www.charitygovernance.com. We also do on site training. In June, we will be speaking at two conferences on non-profit governance, including one where will be leading an all-day training session. A significant portion of both of our presentations will focus on financial reporting issues. Give us a call if you want to head off problems. |
we were close. A follow-up article appeared in Monday's Journal-Sentinel (Week May Yield Clues on Museum's Finances: County is Pressing for Details in Big Deficit, May 8, 2005), and the paper’s editorial board ran an editorial that pulled no punches. The editorial called the shock and anger expressed by Milwaukee County officials “quite legitimate.” The editorial then commented on the departure of the Museum’s chief financial and operating officer, stating:
To complicate matters even more - not to mention increase anxiety in the Milwaukee County Courthouse - the museum's chief financial and operating officer, Terry Gaouette, no longer works at the museum, having left in what was rather cryptically described as a "mutual parting of the ways.
While the editorial noted that the stated reasons for the deficit seemed valid, “they don't quite jibe with the record attendance during last year's highly successful Egypt exhibit.” Toward the end, the editorial demands answers:
With all due respect to museum officials and to this world-class institution, the timing of all this is quite suspect. And since public money is involved, the public is entitled to answers.
According to the Journal Sentinel, both the Museum’s President and the Chairman of the Board “offered assurances that no fraud or theft was involved in the museum's financial troubles.” As placed in the article, that quote from the article’s author, Dave Umhoefer, leaves the reader with the impression that a sigh of relief is in order. The astute reader should still be troubled. Presumably the Museum maintains fidelity insurance, meaning that if there were fraud or theft, the loss might be covered by insurance. The absence of fraud or theft does not bode well because it indicates that in all likelihood there are some serious financial issues facing the Museum.
As the Monday article indicated, Museum officials met with County officials yesterday in what unfortunately turned out to be a closed-door session, according to a follow-up article in today's Milwaukee Journal-Sentinel (D. Umhoefer and A. Link, Museum Layoffs Expected Soon: Reserves Almost Gone, Walker Says).
The Museum's entire predicament is quite astonishing as the facts begin to surface. Scott Walker, Milwaukee County's County Executive is quoted in the latest article as having said "[the Museum] has eaten up almost every reserve fund they have." The cash balance has reportedly dropped from $4.8 million last August to less than $1.0 million. According to the Journal-Sentinel, some county officials have privately discussed bankruptcy, finding a new organization to run the Museum, or "mothballing" it. Museum officials believe that all of this is too premature. They are looking at staff layoffs, as well as a massive capital campaign to fill the financial gap. Hey directors, get ready to pony up. The article indicates that Museum officials are looking for six-figure pledges from directors and other supporters.
We are a bit skeptical. It turns out the operating deficit for the 2004 fiscal year will come in somewhere around $2.4 million rather than the $4.1 million previously reported. The President of the Museum was apparently confused. The $4.1 million figure apparently represented the drop in the Museum's net assets. Quite frankly, we aren't clear what the distinction is because income statements are supposed to reconcile with changes to net assets. The President may be a visionary, as he apparently described himself to the Journal-Sentinel last week, but he should nevertheless know how to read a financial statement.
This is beginning to look like a massive governance failure, putting the spotlight on the Museum’s board of directors. According to the article that ran Monday, the Museum’s board chairman claims that he was surprised by the disclosures. The logical questions: How often does the full board meet? What is the relationship between the board's executive committee and the full board? When did the executive committee first learn of the deficit? Does the board review financial statements at its regular board meetings? If so, do those financial statements reflect variances from budget? Was the CFO at the board meetings to answer questions? How detailed were the financial reports? Even if the board doesn't review complete financial reports, doesn't it monitor cash balances and the number of personnel? Why have the COO and CFO positions been held by the same individual?
We noticed that when we checked GuideStar records, the Museum had a rather large board. This is not unusual for a museum, and in all likelihood reflects the fundraising role generally assigned to museum boards. But as we’ve said before, fundraising is not governance. If the facts confirm our suspicions, the Museum may want to give serious consideration to shrinking the size of its board, and then utilizing a donor-advisory board to reward fundraisers and donors.
We are also disturbed by the Museum president's apparent reference to the problems as the "perfect storm"--the Tuesday Journal-Sentinel article puts quotes around the phrase, attributing it to the president. This is far too glib a description and shifts the focus from governance failures to stochastic and exongenous shocks. If an organization is operating properly, it can manage both the unexpected and troublesome. Part of the current problem is blamed on highway construction in the vicinity of the Museum. That construction was no surprise. So why didn't Museum officials consider staff reductions or furloughs sooner, reduced hours, and incentives to attract otherwise hesitant suburbanites (two-for-one admission, or even free admission with increased concession and gift shop sales yielding marginal revenue)?
In our view, the Museum is making one gigantic mistake: The disclosures are far too slow in coming. Museum officials had better face one fact. They are in partnership with a governmental entity, relying on significant subsidies from it. They may be able to hide behind closed doors for the time being, but in the end, all the facts will be public, as embarrassing as they might be. Secrecy only serves to breed suspicions and create a sense of crisis. Museum officials would be much better off saying: "Look, our institution is a valuable community asset, as evidenced by record attendance levels last year. We made some miscalculations and there have been some circumstances beyond our control. Let's work together--the Museum, the County government, and the public--to put our house to order." This is the lesson that all institutions should have learned from the "Tylenol" murders over two decades ago. Along these lines, we assume the Museum knows that the Milwaukee Journal-Sentinel has a link in its most recent article asking Museum employees to contact the Journal-Sentinel. Whether the Museum likes it not, any noteworthy dirt is likely going to come out. In the long run, the Museum will be better served by being the first to make inevitable disclosures so it at least has some ability to frame the disclosure in a favorable light--although we would strongly advise against sugar-coating diffcult facts.
We always hear about six-figure donations when institutions run into trouble. Why are charities always so quick to ignore ten and twenty-five dollar contributions as part of these capital campaigns? If the Museum is to succeed, it needs buy-in from the enitre community, not just 50 rich people. Those 50 people can give $200,000 each, but that doesn't keep the turnstiles turning and the cash register ringing in the museum shop and any on-premise eating facilities. In short, the low-hanging fruit from rich donors doesn't solve long-term attendance and resource allocation issues. Only better governance and support from the community at large can solve those problems.
Finally, why does the Milwaukee Public Musuem's website provide so little information regarding governance. There is no information or statement that we can find even acknowledging recent events or disclosures. The website doesn't list board members or terms. Nor does the website provide access to financial statements or Form 990 filings. Even if this information is buried deep down within a link, the Museum is still to be faulted for not making it easily accessible. Those who are about to be asked to fund deficits and capital projects should demand some transparency from this institution before opening their wallets.
If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2005, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. For additional information call 773-325-2124HE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
