MOCA ordered to revamp its budget practices

The California Attorney General’s office determined that the Museum of Contemporary Art skirted state law for years enroute to financial meltdown in late 2008 and ordered the museum to hire a consultant to help improve its financial management. The attorney general also required MOCA board members to receive special training in their fiduciary duties.

The findings and “required corrective actions” were included in a two-page letter to MOCA last November. The attorney general’s office provided it to The Times this week after repeated inquiries. Overspending and investment losses drained MOCA’s investment portfolio from a peak of $38.2 million in mid-2000 to $5 million in December 2008. It has rebounded to $14.2 million as of March 31, museum officials said, fueled largely by fresh donations.

Belinda Johns, senior assistant attorney general for charitable trusts, concluded that “unreasonably enthusiastic expectations” by museum management led to overspending and that the board apparently was not informed in time to act when budget deficits loomed. Johns also found that MOCA did not follow the law when it paid general expenses from endowment funds that were restricted for specific uses.

The financial crisis at the museum, whose exhibitions and 6,000-work collection of post- World War II art are considered standard-setters in the contemporary art field, was reported by The Times in November 2008, and the investigation ensued. That December, MOCA’s board adopted a financial rescue plan engineered by philanthropist Eli Broad. Longtime museum director Jeremy Strick resigned, and former UCLA Chancellor Charles Young took charge as MOCA’s chief executive, with a mandate to stabilize its finances. Annual spending has been reduced from more than $23 million to $15.5 million.

Meanwhile, MOCA says it has raised $8.5 million for the endowment, half of it from Broad, who has pledged to match endowment gifts dollar for dollar until $30 million has been restored. Young said MOCA was on track to have a budget surplus this year, which would position it to return some additional money to the endowment, along with a match from Broad.

MOCA’s financial records show it began tapping restricted endowment funds during its 2000-01 budget year. Johns said the investigation determined that it was done without getting the donors’ written permission or obtaining a court order, as required by state law. The investigation also found that MOCA did not abide by a law that required nonprofits to spend only the investment earnings from endowment funds, leaving their principal untouched (since 2009, the reins have been loosened, with California nonprofits now allowed to spend up to 7% of their endowments annually, regardless whether that eats into the principal).

MOCA justified spending restricted funds with the “theory” that it would replenish them when it was able, Johns wrote, but “there is no legal authority for withdrawals based on such a theory, and even if there were, it does not appear the board implemented such a plan.”

The attorney general did not require MOCA to make its endowment whole again, but Broad already had insisted on that as a condition of his bailout. Young said Thursday that rebuilding the endowment was “a necessity as far as the board is concerned.”

The kinds of fiscal management changes sought by the attorney general were well under way by the time Johns issued her findings, Young said, but “the attorney general’s letter made it easier, provided a process to follow….We wouldn’t have come up with exactly what we did if they hadn’t been involved, but it wouldn’t have been substantially different.”

The upshot of the changes, Young said, is that there are now “regular procedures in place” for funneling information on MOCA’s financial position to the board’s committees on finance, investment and audits. MOCA’s board is expected to adopt the policies at its June meeting, a museum spokeswoman said; Johns has given MOCA a May 17 deadline for submitting a copy to her for review.

Strick, MOCA’s director from 1999 through 2008, could not be reached for comment. He is now director of the Nasher Sculpture Center in Dallas, which hired him about a month after his ouster from MOCA.

MOCA’s board, now with 34 voting members, typically has included a mixture of philanthropists, art collectors, artists and business people. Longtime members who served through much of the period of its dwindling endowment and remain on the board include Fred Sands, a real estate and financial services executive; advertising executive Clifford Einstein; former A&M Records president Gilbert Friesen and Amgen biotech executive Fabrizio Bonanni.

When board members were told the attorney general was insisting they attend a training session about their financial responsibilities, Young said, “I think a couple of people said, ‘Gosh, I know all that stuff.’ We said, ‘We’re glad you know it, but we have a requirement that you have the same information as all the other board members, and that we’re all operating on the same set of assumptions and policies.’” He likened the exercise to the emergency instructions flight attendants give before a plane takes off — dull for experienced airline passengers, potentially crucial new information for others, but a sensible precaution for all.

Munger,Tolles & Olson, a law firm that represents MOCA, has provided the fiduciary training pro bono in both group and individual sessions, Young said, with all new trustees receiving it as they join.

A spokeswoman for the Attorney General’s office said Thursday penalties could include a requirement that board members repay money drawn improperly from an endowment, but “whether and how that occurs is based on the facts and circumstances of each situation.”

Los Angeles attorney Douglas Mancino, an expert on nonprofit law, said that California law absolves volunteer board members of personal liability in cases of overspent endowments, as long as they didn’t benefit personally. He said that one possible penalty could be removal from a board, which would require the attorney general or a fellow board member to bring a lawsuit.

The portrayal of an uninformed MOCA board in the attorney general’s letter conflicts with accounts some museum board members and former members gave in interviews at the time of its crisis in 2008. Susan Bay Nimoy said at the time that she had left the board in 2006 out of frustration with MOCA’s overspending. “We all got the financial reports and saw exactly what was happening,” she recalled. “Some people saw it and tried to tell the leadership that this was a train wreck waiting to happen. Those of us who protested were ignored, and we left.”

Jeffrey Deitch, a high-profile New York City art dealer, is giving up his business to become the museum’s director starting June 1. He’ll be the fourth director since MOCA’s founding in 1979.