DATELINE: April 3, 2009, Chicago
Stuart Pfeifer of the Los Angeles Times is reporting another sad story about a nonprofit that relied too heavily on a pledge that will most likely go unpaid. Donor’s Legal Troubles May Force Museum into Bankruptcy. The Children’s Museum of Los Angeles was relying on a $10 million pledge from one Bruce F. Friedman that he made last year. The museum’s new facility was completed in 2007 so the pledge apparently was not for construction costs. It appears that it was to be used to purchase exhibits and cover operating costs.
Unfortunately for the museum, the SEC recently filed a...
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suit against Mr. Friedman, alleging that he diverted more than $17 million from investors in a company that he owns. The pledge was made through the Friedman Charitable Foundation. To date, the museum has received less than half the payments called for by the pledge, according to the Times. It is unlikely that any further payments will be coming soon because the SEC persuaded the judge to freeze assets, which apparently include the foundation’s assets.
We can harp on the need for background checks, but in this case it is unlikely that background checks would have done much good. Nevertheless, background checks are certainly a best practice when the pledge is large and the donor is not Bill Gates. There, however, are a number of issues worth exploring.
First, we do not think the board thought the finances for this project fully through. It is troubling to us that the completed building sat vacant for what appears to be two years because the museum did not have the funds to purchase exhibits. In our view, construction should never have started until the entire project could be brought to fruition. That means have commitments for all the financing.
Our criticism is particularly warranted given that fact that the museum would still have been $22 million short of the $58.5 million needed to open even had Mr. Friedman paid the pledge. We don’t have the spreadsheets or budgets that the board and the museum’s staff relied on, but the budgeting process and financial analysis looks very weak. The museum may have been better off renting space for five years and buying the exhibits so that it could open. The museum might not have been state-of-the-art, but an operating museum might have been in a better position to raise additional funds.
Second, the Friedman events apparently have had a direct impact on fundraising. The Times reports that the museum has not received a single donation since the SEC filed suit. Moreover, other donors have rescinded $100,000 in pledges. It is well established that nonprofits rely on large seed or lead grants to inspire others to commit funds. That is legitimate, but the present situation demonstrates the potential peril of relying on just one large donor.
The Times also reports that museum officials are in discussion with a court-appointed receiver over whether they are required to return the money that the Friedman Foundation alreayd paid under its pledge. This is a problem similar to the one faced by investors who received distributions from convicted felon and all-around bad guy Bernard Madoff. Once again, we can’t criticize the museum or its officials for these circumstances. But what hopefully is a relatively rare occurrence demonstrates why broad support and a solid financial plan are necessary before putting the shovel in the ground.
Unless an angel drops down from the sky or more likely, a country club, the museum faces bankruptcy. In fact, the board voted to declare bankruptcy at a March 27th meeting.
Another unfortunate situation, likely tied to the downturn in the economy.
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