The turn of the millennium was a heady time for many Chicago cultural institutions. Cheap loans, high investment returns and swelling endowments spawned a slew of new attractions along the lakefront and around downtown.
The Art Institute built its Modern Wing. The Adler Planetarium expanded. The Goodman Theatre constructed a new home in the recently re-energized theater district. New exhibits sprang up at the Field Museum and the Museum of Science and Industry. The Chicago History Museum underwent a gut rehab.
Cultural institutions were joining in the economic bonanza sweeping the country and, as with for-profit companies and individual homeowners, some would pay dearly for taking financial risks.
Encouraged by boards that included some of Chicago's most influential corporate leaders, many museums and arts organizations decided to leverage their gains by borrowing tens of millions of dollars to fund expansions, renovations and other big-ticket projects.
None has suffered the kind of crisis now playing out at the Field Museum, which expects to slash spending and could lay off scientists. But whether it was job cuts at the Art Institute, price hikes at the Chicago History Museum or a strike at the Chicago Symphony Orchestra, many experienced difficult times.
The faltering economy and cuts in government funding explain part — but not all — of the problems facing cultural institutions, experts say.
"The recession blew a lot of people's projections and plans," said Carroll Joynes, co-founder of the University of Chicago's Cultural Policy Center. "But the plans would have been unrealistic in many cases and freighted with not very good risk assessment, even if the economy had kept humming."
Joynes was co-author of a recent national study that found Chicago-area cultural institutions spent $869 million on building projects from 1994 through 2008. That's more per area resident than New York or Los Angeles.
Some major institutions banked on a rise in attendance revenues after major building projects were completed, an assumption that often failed to pan out. Others, swayed by overheated financial markets, presumed that investment returns would stay high enough to cover borrowing costs and fund operations.
"Every institution you are looking at put a lot of debt on its balance sheet in the past two decades," said former Exelon Chairman and CEO John Rowe, who chairs the Field Museum board, is a life trustee at the Art Institute and chaired the Chicago History Museum board during its renovation project.
"And they did that because you could improve your income statement and pay for more exhibits and more cool things by borrowing tax-exempt money and investing your own money."
Like hospitals and private universities, museums can issue tax-free bonds through the Illinois Finance Authority, a state-created entity.
Since the recession, many cultural institutions in Chicago have struggled with debt service payments, pension shortfalls or operating losses. But those that borrowed conservatively, raised money ahead of time and projected realistic revenues have generally bounced back.
The Lyric Opera of Chicago, for example, launched a fundraising campaign in 2004 specifically to deal with budgetary shortfalls that might arise. In just three years the opera raised $32 million, exceeding its $25 million goal. Then after the economic downturn, the Lyric was able to draw on that fund to balance its budget.
The Goodman Theatre waited until 80 percent of the money had been raised before breaking ground in 1998 on its $46 million building at Dearborn and Lake streets. When the theater cut its budget in the wake of the recession, the belt-tightening didn't last long.
"The fact that we made a prudent decision regarding the building and didn't have extraordinary debt payments enabled the board to be very proactive in restoring the cuts," said Roche Schulfer, executive director of the Goodman for the past three decades.
Envisioning a new home bustling with lectures, performances and art shows, the Spertus Institute for Jewish Learning and Leadership left its cramped headquarters in 2007 for a glass tower that's now considered one of Michigan Avenue's architectural gems.
The nonprofit borrowed about $52 million in 2005 to build the $55 million tower, which contained galleries with 16-foot ceilings and a large loading dock expressly for bringing in large artworks.
Within a few years of moving into its new home, however, the Spertus was facing large debt payments related to the building and could no longer afford to host major exhibitions. That meant the institute could no longer raise revenue by charging admission to those exhibits.
By 2012 the Spertus had laid off more than 50 percent of its staff. In January, the 89-year-old institute announced that it is narrowing its mission and cutting programs for children and teens.
The Spertus' troubles stem in part from an anemic fundraising effort that had netted just $17 million by the time the institute began construction on the new building. Consultants and others who research and advise nonprofit cultural institutions generally recommend raising at least half the money needed for a building project before breaking ground.
Like many of its peers, the Spertus disregarded that maxim, believing donations would come in after construction started. According to the institute's strategy, investing the donations would generate returns that would pay off the debt and then some.
"The idea was that the interest rate (the institute) would be getting on the endowment would be better than interest rates they are paying on the bonds," said Dean Bell, the institute's dean since 2001, "and so there would be an opportunity to retire that and have some savings left over."
That didn't happen, and the institute is struggling to recover.
Though Spertus is an extreme example, it wasn't the only cultural institution to go out on a limb when launching large construction projects. The Art Institute broke ground on its Modern Wing in 2005 without knowing how much the structure would eventually cost, a recent study by the Cultural Policy Center at the University of Chicago said.
At the time the board voted to start construction, the study found, the museum had not yet calculated the price tag for costly additions to the project, including a bridge from Millennium Park and another floor in the new wing.
In the end, the museum needed about $380 million to cover the cost of construction and bolster an endowment whose returns would fund the wing's operation. That meant the $162 million pledged when the institute broke ground turned out to be only about 43 percent of the total — below the threshold recommended by museum construction consultants and experts.
"There was some risk," said Art Institute Chief Financial Officer Eric Anyah, who's been with the organization since 2003. "But (former director) Jim Cuno and (former board chairman) John Bryan had confidence that once we broke ground, the pledges would come."
Indeed, by the time the Modern Wing opened in 2009, the museum had booked all the pledges it needed and then some, museum officials said, though that money would trickle in over many years.
In the meantime, the museum bridged the funding gap by taking out short-term construction loans and then paid them back after issuing $140 million in bonds in 2009, driving up the institute's total liabilities to $452 million, the highest ever. The year the Modern Wing opened, the institute's endowment took a major hit — losing a quarter of its value, or about $224 million — as financial markets plummeted. That, in turn, affected the amount of money from the endowment that the museum could rely on to operate.
Museum officials say the Modern Wing had nothing to do with financial strains it has experienced in recent years.
"It was not a misjudgment on the part of the institution of how much money we needed," said David Thurm, the museum's chief operating officer since March 2010. "The issue was we opened the door and boom, the recession hits. Had there been no recession, there would be no story."
The Art Institute also disputes findings from the U. of C. study that concluded that the institute was partly to blame for its financial troubles. The researchers pointed to a shortfall in endowment money needed to operate the 264,000-square-foot Modern Wing.
The institute implemented cost-cutting measures after opening the addition, including pay freezes, furloughs and two rounds of layoffs that affected nearly 100 people. Ticket prices have also increased twice, and they are now mandatory rather than suggested.
Millions in debt
Other Chicago institutions still owe tens of millions for projects completed more than a decade ago. The Chicago Symphony Orchestra's Symphony Center and the Adler Planetarium's Sky Pavilion both opened in the late 1990s, but neither institution has made a dent in the debt racked up to fund the expansions.
The Adler's $27 million loan, a manageable liability in good times, became a strain on the balance sheet when the downturn hit and the planetarium's assets dropped lower than its total debt.
Janice Promer, the Adler's chief operating officer since March 2010, noted that the $27 million is not due until 2031 and said the figures suggest "a more difficult position than the Adler currently faces."
Yet the Adler has run up a total operating deficit of $16.6 million during the past decade, posting surpluses only three times during that period, according to audited financial statements.
The CSO, meanwhile, has $145 million in bond debt, most of it related to the $110 million renovation of Orchestra Hall into the Symphony Center. With flat revenues and rising costs, the organization has lost money the past two years and last year faced its first musicians strike in more than two decades in a dispute over wages and benefits.
The Art Institute might be similarly weighed down were it not for two things: the museum's $800 million endowment and an elite school that is among the most expensive four-year universities and colleges in the country.
In the years leading up to the opening of the Modern Wing, the school added more students and increased tuition and fees. Its operating surpluses quadrupled from 2005 to 2012. Institute officials say the school and the museum do not coordinate activities.
The institute's deep pockets allowed it to issue $100 million in bonds late last year so it could restructure its debt and shore up its pension plan — options museums like the Spertus don't have.
"We didn't start with an enormous endowment to begin with," said Bell, Spertus' dean. Those who did, he said, "could weather the storm."
In borrowing so aggressively, Chicago cultural institutions often assumed that their ambitious building projects would increase attendance and thus revenue.
"There is obviously a lot of enthusiasm for making (cultural institutions) bigger and better. It's well-intended, to improve the institution," said Barry Lord of Toronto-based Lord Cultural Resources, a consulting firm that advises museums.
But Lord said museum boards sometimes forget to ask: "Is the market showing that much demand?"
Art Institute officials expected a permanent increase in attendance to follow the opening of the Modern Wing. But so far that hasn't happened. Attendance did spike, but it then settled back to historical levels. When the Field Museum borrowed for new exhibits and improvements in 2002, it predicted that up to 50 percent more people on average would visit. But the Field's attendance remains roughly the same today as before the projects began. Other institutions counted on the markets to keep them in the black. The strategy worked well in the years leading up to the financial crisis, when huge investment returns from endowments offset routine operating losses at many museums.
The Chicago History Museum embarked on a $28 million makeover in 2005 even though it had run operating shortfalls seven years in a row. Even its gift shop was losing money.
Yet as the museum's vice president of finance pointed out, money from a thriving endowment more than offset those deficits. "It really seemed, at that point in time, to be OK," said Cheryl Obermeyer, who has been with the institution for three decades.
Since it reopened in 2006, the history museum has shored up its financial position by more than doubling ticket prices to $14 and making them mandatory rather than suggested.
By contrast, the Shedd Aquarium rarely draws on its endowment. It took out less than 1 percent in 2009 and 2010 and nothing in 2011. The aquarium had no layoffs during the recession, said Executive Vice President Roger Germann, and the Shedd recently saw its debt outlook upgraded.
The aquarium's approach to capital improvements is also more conservative than that of some of its peers. When the aquarium opened its Oceanarium in 1991, Germann said, it created a separate designated endowment in anticipation of the day the facility would need upgrades. By the time the Shedd began a $79 million renovation of the Oceanarium in 2008, it had already accumulated $45 million — about half in pledges and half in endowment income — for the project.
"I definitely would not say that any one of us rests on the laurels of, 'We have one of the best collections in the world; if you build it they will come,'" said Germann, who has been with the Shedd since 2000. "No. They won't."
Some executives and trustees see the past decade as a cautionary tale for cultural institutions.
"All of us overdid the borrowing," said Marshall Field V, a Field Museum trustee who also served for decades on the board of the Art Institute. "Those bonds are going to be coming due in the future, and as you point out, we're going to have to set aside more and more money to pay them off."
Those costs will weigh more heavily on some institutions than others. Museums like the Art Institute have managed to mitigate problems by restructuring debts. For others, like the Field Museum and the Spertus, the damage is still unfolding.
"Obviously looking back now, you say, 'Well, gee, you really want to have more money before you do these kinds of projects,'" said Bell, the Spertus' dean, "and certainly that's one of the lessons that's been learned."
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