Are feasibility studies a racket? If not, then why do so many capital campaigns derail?

Last Friday, I read a story posted on AJ about Michigan Opera getting a one month reprieve on the $11 million it must pay to Chase Bank if it is going to avoid a possible bankruptcy related to delinquency on a bond obtained for a capital expansion in 2004. How did this arts organization get here? I’m assuming there was a feasibility study at the outset and that the feasibility study gave the arts organization a green light, right?

So how did it end up several million dollars “short” on its campaign? How did we end up hearing yet another story about another arts organization struggling under the debt service associated with a new building, or struggling to maintain higher than expected operating costs following the opening of a new building, or struggling to maintain the minimum amount of cash on hand required for a bond agreement? The recession, I’m guessing, is the party line. But as we all know, there’s always more to it than the recession. Besides, don’t feasibility studies account for the possibility of economic decline when they are giving their assessments? If not, perhaps they should.

Is it possible that either feasibility studies cannot be trusted or arts organizations cannot be trusted to heed the findings from them?

I have never led a massive capital campaign for a building or endowment. I have, however, worked at an organization struggling to operate after such a campaign related to a building expansion. And I have worked at a foundation that was continually approached by organizations seeking increased support for ongoing operating costs after their new buildings were opened. Here is my slightly tongue in cheek characterization of a typical conversation with a feasibility study consultant when I was working at a foundation:

Consultant: As I believe you are aware, Leading Arts Organization has the phenomenal opportunity to build a new facility, which will blah, blah, blah.

Me: Yes, I do know this.

Consultant: Have you seen the plans?

Me: Yes, I’ve seen the plans.

Consultant: It’s going to be a phenomenal venue, don’t you think?

Me: The architecture is pretty stunning.

Consultant: I’m sure you know why we’re calling you. You have long been a supporter of Leading Arts Organization. May we assume that this means you see value in what they do?

Me: Yes, we tend to make grants to organizations that we perceive to be doing great work and that fit within the limited priorities of the foundation.

Consultant: Would you say that your grants are competitive?

Me: Yes, in the sense that we have limited means so we cannot fund everyone doing great work.

Consultant: Of course, so it’s all the more meaningful that you provide support to Leading Arts Organization.

Me: I suppose.

Consultant: Over the next X years, Leading Arts Organization will be seeking to raise an Ungodly Amount of Money Given the Size of Its Operating Budget. This amount will support both the new facility and an operating endowment. This expansion will make it possible for blah, blah, blah. I know you currently provide programmatic support to Leading Arts Organization. Would you also consider a meaningfully sized gift to the campaign within the next two years?

Me: No that is not something we are able to consider.

Consultant: I understand, and had been told that, but just wanted to confirm that information. In that case, as you can imagine, Leading Arts Organization’s operating budget will significantly increase with the move to its new building. To sustain all of the great new educational programs and ambitious, large-scale works that will be made possible once the facility is completed, it will be counting on increased support from its most loyal donors. Would you consider increasing your annual programmatic support to Leading Arts Organization?

Me: We do not promise funds in perpetuity to organizations nor can we commit to increasing the level of support that we provide in the future because an organization’s operating budget is increasing due to a facility expansion.

Consultant: I see. I notice that you made a grant to An Organization Like Ours in the past to support new programming after its new building was opened.

Me: Yes, we did. But, again, we cannot promise today that we can do such a thing in the future for another organization.

Consultant: But it is not impossible to think that, four years from now, when the building is completed, that Leading Arts Organization could apply for similar support for some of the new programs that it is planning and that you would respond favorably to that request?

Me: No that is not impossible; but I would stress that the organization should not count on such support when doing its planning.

Consultant: I see.

Then generally a bit of chit chat as the consultant reiterates the need for the facility, all of the benefits to the community, and perhaps asks a couple more questions. Then, inevitably, the call would end like this:

Consultant: So, I understand that the foundation cannot support the current capital campaign; however, it is fair to say that you think highly of Leading Arts Organization, that you understand the need for the expansion, that you are committed to continuing programmatic supporting for Leading Arts Organization through the campaign, and that you would consider increased support for new programs when the campaign is completed.

Me: No. I’m sorry if I was not clear. Leading Arts Organization should not plan on increased support from the foundation in the future. That’s what should be conveyed.

Consultant: Mmhm.

My hunch is that the large majority of feasibility studies conducted are irrationally exuberant and portray campaigns and the expansions that they support as being sustainable when, in fact, the large majority of them are not. Why would they do this? Well, the cynical side of me assumes it is because (a) consultants are not generally hired to deliver the truth; rather, they are hired to legitimize the choices that arts organizations and funders have already determined to undertake and/or (b) feasibility consultants often stand to gain from campaigns that go forward as many of them offer ongoing fundraising or building consulting services.

One thing I do know from doing a number of these interviews is that these plans are always notoriously vague. No one will ever say to a potential donor:

Here’s the deal, if we go forward, we will need you to give support from now until you die and we will need for your annual commitment to us to increase by 300% over the next three years and then by 15% every year thereafter. And if you and many other people do not do this then we will be on the verge of bankruptcy within 5 years and will need to do a special emergency campaign. At which point we will go back to everyone that gave to this campaign in the first place and make them feel obliged to throw good money after bad and keep us in this building that we cannot afford for another year or two by making what we will call a “one-time stretch gift”. Of course this is a somewhat deceptive term as we will keep coming back to you and doing this as often as is necessary to keep us in this building, for as long as we both shall live. (PS: We are, of course, counting on the fact that you will consider a bequest, as well).

So what’s the solution?

I’ve been thinking for a few years that perhaps we need feasibility studies undertaken on behalf of “the people” of the community—paid for with local government funds but hired and supervised by an independent committee. Think of it as spending a little to save a lot. Not only are many facility campaigns kicked off with massive grants from local governments but many local and state arts councils award grants on a formula basis (meaning the larger your budget the larger your grant, relatively speaking). Thus, once the facility is completed the people might expect that even more dollars will be flowing to the arts organization on an annual basis.

This audit (which could be in addition to the audit commissioned by the arts organization) would be aimed at:

• Accurately projecting the capital campaign costs (assuming the delays and inflation that are inevitable), the size of operating endowment that would be needed to cover costs related to the facility, and realistic income and expense projections the first 15 years in the building.
• Determining to what degree there is sufficient commitment in the community to support both the costs associated with creating or renovating the facility and the ongoing operating costs.
• To calculate the anticipated increased amounts that would likely need to be given by the local government, major arts foundations, and key major arts donors over time (i.e., the ususal suspects that often end up holding the tab on these projects, especially when they go south).
• To assess the feelings of the local community about a potentially significant amount of government dollars being invested in the organization if the building were to go forward (and the opportunity costs associated with that commitment). For instance, there could be a question such as: “The city is trying to decide between investing funds in a new opera venue or a new aquarium. Which of these would be more valuable to you and your family?”
• Finally, such an assessment could assess not only the feelings of those living in the area that would be on the receiving end of any building planned for the future, but the people on the losing end, so to speak (that is, those living in the neighborhood that will lose the arts organization when it moves).

[A brief tangent related to this last bullet point: In response to my post last week on the new Barnes one of my favorite bloggers, Scott Walters, posted the comment, “While Montgomery County is certainly not rural, Merion is an unincorporated town. The move to Philadelphia continues the urban centralization of the arts.” I wonder: How did the people in Merion feel about their museum being taken away? How will the loss of the collection impact their local community? Were their voices heard in this process?]

Are capital expansion feasibility studies a racket—a deception between organizations and consultants that stand to benefit from positive assessments? If so can we fix this? Would feasibility studies commissioned by local governments help, or would those be just as corrupt? Why do so many campaigns derail and run out of steam? Why are the expansions so impossible to sustain over time? How do we get a better picture of the total costs of ownership of these buildings? How do we recognize a potential disaster in the making before loans are issued, grants are awarded, and architects are hired? And if the problem is not with the way these feasibility studies are executed and interpreted then are we to assume that donors lie when asked about whether they’ll support an organization’s expansion plans—that they promise generous support but then change their minds?

Or what else could it be? And, equally as important, who should be held accountable when these projects end up millions of dollars in debt?

I would love to be proven wrong about my suspicions in this realm and hope that those that undertake such studies, arts leaders, consultants, and donors to these campaigns will weigh in and share their thoughts.