The Grasshopper and the Ant

Published in: GIA Newsletter, Vol 9, No 2 (Fall 1998)

Morrie Warshawski

Currently they hold almost $70 million in assets. With some luck and hard work, they hope in ten years to increase that amount ten-fold to over $750 million. They can be found east and west, north and south. They are modest and ambitious. They are large and they are small. And, most importantly, they are changing and challenging the very nature of public funding of the arts nationwide.

"They" are state cultural trusts for the arts currently established, or in the process of being established, by almost a quarter of the state arts agencies throughout the U.S. including Arizona, Colorado, Connecticut, Delaware, Indiana, Iowa, Missouri, Montana, Nebraska, North Dakota, Puerto Rico, Texas, Utah, Vermont, and Wyoming. These states are engaged in a grand and diverse experiment to conjoin public and private funds in a variety of formulas from a rainbow of sources. Their trusts range in size from current holdings of $2 million in Arizona to $21.5 million in Delaware. Their ambitions for the future jump from a goal of $10 million in Nebraska to as high as the $300 million target in Texas.

According to Anthony Radich, architect of the Missouri Cultural Trust while executive director of the Missouri Arts Council before becoming executive director of the Western States Arts Federation, “The one core mechanism that all these efforts share is the intention to identify and collect a substantial amount of cash in an investment corpus for the purpose of investing that principal to benefit the arts.” After that, everything else is up for grabs, including where the money will come from, who will raise the money, who will hold and invest the money, and how it is used.

Why are state arts agencies turning to this mechanism thirty years after their birth?

The movement toward creating statewide endowments comes at a time when many nonprofit agencies are looking for new revenue sources for the arts. Over the years state arts agencies have watched as a number of creative new efforts have taken root, including hotel and motel tax initiatives (e.g. San Francisco, St. Louis, King County in Washington state), percent-for-the-arts programs that target a portion of new building funds toward commissioning new art works, cultural and scientific districts like the one in Denver, and community-wide initiatives such as the Silicon Valley Arts Fund and the North Coast Cultural Trust, both in northern California. As Peter deCourcy Hero, president of the Community Foundation of Santa Clara County, says about the purpose for the Silicon Valley Arts Fund: “The idea is to increase the total number of philanthropic dollars contributed to the arts, rather than each organization trying to increase its market share of existing cultural contributions.”

During this same period — the early 1990s — the states began to worry about their own budgets due to a host of factors: cutbacks from the National Endowment for the Arts, substantially lower appropriations from their own state legislatures, aggressive adoption of state taxing and spending limitations, and the growing public questioning of the appropriateness of supporting the arts with public funds. Fran Holden, executive director of the Colorado Council on the Arts, very honestly admits that a major reason for her efforts to create a trust is that “One-third of our budget comes from federal grants. We see our fate tied to that of the NEA.”

Jennifer Severin Clark, executive director of the Nebraska Arts Council, echoes Holden's sentiments. Clark has just completed a statewide initiative that resulted in the creation of the $5 million (hoping to grow to $10 million) Nebraska Cultural Preservation Endowment Fund to support her agency and the Nebraska Humanities Council. She traces the beginning of the idea for the Endowment Fund squarely on “...the controversy at the National Endowment for the Arts in 1994.” This concern led to the establishment of a Cultural Trust Task Force, which ultimately resulted in the creation of the Fund. To Clark, the idea of an endowment is long overdue and just plain common sense — something she likens to taking care of your personal finances, or the tale of the grasshopper and the ant. “You make one dollar and put a portion in savings. If we had done this from the beginning, all the state arts agencies would have big endowments by now.”

For Peggy Amsterdam, executive director of the Delaware State Arts Council, the initial impetus for the creation of the now $21.5 million Delaware Arts Stabilization Fund did not originate within the agency, but from her constituents. A few arts organizations told Amsterdam that they intended to go one-by-one directly to the legislature to ask for individual line-item funding. As Amsterdam recalls, the secretary of state warned, “You can all go to the legislature separately and one of you will probably get funding, but ultimately all of you will look like idiots.” Thus began the collaborative process that resulted in what Gary O. Larson in The American Canvas calls “...one of the most remarkable achievements in all of cultural philanthropy...” and currently the best funded of all the trusts.

In Arizona, Shelley Cohn, executive director of the state's Commission on the Arts, took a look around her during the agency's 1995 planning process and asked, “Where are the funding gaps? We realized that Arizona is a state that does not have many large endowments and saw this as an opportunity to leverage funds.” As Cohn points out, timing is everything. The economy was turning around in her state, and when legislators were approached they were open to an idea that was “...creative, time-specific, and did not involve a new tax” — elements common to the success of establishing many of the trusts.

“Even if a trust fund initiative does not result in the establishment of a fund, the process of proposing such an arts funding structure creates an important new avenue for dialogue with state legislators,” notes Anthony Radich. “This is especially true of conservative legislators who like the idea of an endowment that might attract private money. It resonates with them and solves a problem. A lot of conservatives like the arts but have to posture against the arts — a targeted endowment provides them with a way out of their dilemma.” Amsterdam punctuates this point when she says, “With state arts agencies, funding has always been done the same way. For the first time we have become politically savvy and are creating funding strategies for getting funds in new and different ways.”

Where is the money coming from?

How do I fund thee, let me count the ways:

  • Legislative appropriations
  • Private foundation support
  • Corporate donations
  • Dedicated revenue streams
  • Bonds
  • Fundraising events
  • Special taxes
  • Individual donations
  • Corporate filing fees
  • Sales of arts license plates

In other words, the states are finding the money for their trusts from every conceivable nook and cranny of the funding world. The major theme for many of the states is the use of a one-time or limited special state appropriation of public funds not as the mainstay for the endowment, but rather as a leverage used to lure private funds. No one set formula has worked for all the states. Rather each state has had to piece together its own site specific patchwork quilt from the materials and resources at hand.

Often the long struggle that results in legislation authorizing a trust can be just the beginning of an even longer struggle to find money to fill the coffers of the trust. Missouri has one of the most ambitious goals of all the states for its Cultural Trust — a corpus of $200 million by the year 2008. Even though the Trust was authorized in 1993, it took two more years to approve a dedicated revenue stream — allocation of a portion of state income tax levied against non-resident performers and professional athletes working in Missouri. Currently the Trust holds approximately $13.5 million garnered from the tax plus a $1 million appropriation from the state's general fund (with a promise of $1 million more per year for the next nine years).

If Missouri can raise half of its Trust's corpus from state appropriations and the entertainment tax (estimated at being able to generate $7 million to $10 million annually), the Arts Council will still have to find another $100 million in private funds over the next ten years — a major effort for a state arts agency unfamiliar with aggressive private fundraising efforts. Flora Maria Garcia, executive director of the Missouri Arts Council, is discovering what a number of other state arts agencies have found out: “People are not comfortable giving to state governments, they don't trust state governments, and private donors want to earmark donations. Also, our constituents are worried about competition from our fundraising efforts. We are going to have to recast our message — that the Trust is for the good of organizations statewide, not for the Arts Council.” Missouri is in the process of deciding exactly how it will conduct its private fundraising campaign. It has the advantage of being able to use some of the Trust's funds for administrative expenses to staff the fundraising effort.

Many other states did not build this into their trusts' charters, and therefore are in the ironic position of having more money to administer and/or raise but with the same staff and no additional resources. “We are not equipped for fundraising,” admits Shelley Cohn. “Anyone thinking about this type of trust should find ways to fund the administrative side.”

The act of fundraising has made state arts agencies more collaborative than ever before and more entrepreneurial. For instance, many of the trusts have had to partner with their constituents to raise matching funds. It is not unusual for a trust to be set up like a “challenge grant.” In this case, individual arts organizations get donors to target funds to their own endowments, and the money raised is used as a match for the statewide trust funds. The state holds a designated portion of the state trust fund, and perhaps the private funds raised as a match, in the name of each specific cultural institution, and then writes checks that reflect the agreed-upon share of earnings from these funds. The formulas can get a bit complicated, but the idea is simple and pragmatic: get the best of both worlds by leveraging new public funds to lure private donations, but ease the fears of private donors by allowing them to target an organization outside the state treasury (e.g. a new private nonprofit entity, a community foundation, or the arts organization itself.)

How are the funds being invested and used?

In almost every instance, these trusts and the state appropriations that help form them, are intended to be supplemental and not replacement instruments. Only Texas has established its Cultural Endowment Fund with the intention of using it eventually to completely replace its biannual appropriation from the state. Otherwise, the range of possible uses mentioned run the full gamut:

  • Endowment funds for arts organizations
  • Individual artist fellowships
  • Support for current programs and administration of the state arts agency
  • Folklife programs
  • Rural arts
  • Historic preservation
  • Professional development and technical assistance
  • Debt reduction for arts organizations
  • Capital reserves for arts organizations
  • Capital improvements
  • Operating support for arts organizations
  • Statewide arts awareness campaigns

One of the more interesting by-products of the cultural trust “movement” has been an accelerated synergy of public and private. Imagine yourself at the helm of a public agency that has dealt exclusively with public funds, suddenly faced with the very different parameters for administering private funds, and you can begin to appreciate the new world faced by state arts agencies. You can also get an inkling of the hybrid animals the state agencies have had to become to deal effectively with this new life — neither fish nor fowl, neither wholly public nor wholly private.

“How many of us as state arts agency directors thought we'd be investment bankers?” asks Amsterdam. “All of a sudden, you become the investor of public and private funds in instruments like gold, bonds, mutual funds, etc.” John Paul Batiste, director of the Texas Commission on the Arts, admits: “This is new territory. We've never been involved in private development — we don't have that expertise.”

While some states leave all their funds in the hands of the state treasury, most use other mechanisms to manage their funds. Some turn to the organizations in their states that already have expertise in the investment and management of private donations — community foundations. Some set up separate boards and committees. Others employ a combination of all available options, typically leaving public funds in the state treasury and farming out the private funds. This allows the new trust to accrue a higher rate of return on its investments than would be possible under the usually conservative practices of the state treasury — a major concern of private donors and of the state arts agencies themselves who want to see more than the five to six percent interest that most treasuries earn.

Widening the investment horizon has allowed for increased partnering
opportunities in each state. It also means that state arts agencies who follow this path must be aware of a subtle shift in their roles from being predominantly arbiters to now being partially caretakers — from entities that receive public money exclusively and then decide how it will be distributed, to an organization that now nourishes a variety of funds for the arts, some of which are pre-targeted by private donors. Trusts have the potential to substantially reduce the discretionary funding abilities of an agency. As they move forward, states will need to ensure that they maintain pools of discretionary funds from which to initiate new programs, to fund emerging arts efforts, and to respond to emergencies.

Risks and Rewards

It is interesting to note that not one of the state arts agencies with a trust has any desire to completely sever its ties from its state legislature. Even Texas, which has as its goal a trust large enough to keep it from having to ask for any further funds from the legislature, plans to remain a public agency. Batiste sees his efforts as “...a partnership of the best of both worlds. We realize that the private sector has its own problems... Philosophically, we need to remain open and accountable, and the public must be a part of this process.”

Directors of state arts agencies speak fervently about their belief in staying tied to the public by remaining in the appropriations loop. Garcia: “It is important for citizens to have arts as part of their infrastructure.” Clark: “We think it's critical to be part of state government. We want to always be held in the public trust.” Cohn: “I believe the annual appropriation process is important as a way to keep your issues in front of elected officials — to keep them engaged and informed. After all, the budget process is the one time they have to pay attention to us!”

One concern has been that state legislatures may see the trust as a convenient reason for diminishing and/or eliminating regular appropriations. Holly Sidford, program director for the Lila Wallace-Reader's Digest Fund, agrees that “The worry about private sector initiatives allowing public sector withdrawal is serious. But still, public funds are a useful wedge to increase private sector support.” As Garcia notes: “Of course, any legislator can use this as a zero-out argument, but in a state arts agency there has never been security in perpetuity.”

In fact, with respect to funding levels, the fear has been moot. Most state arts agencies that have established trusts have also seen their own regular appropriations increase during the same period. Even so, Amsterdam cautions that during the fundraising stage you have to tell legislators and donors “...to maintain their current level of giving in the arts. You must emphasize this to funders — you have to tell them.” Ergo the leaning by most states to use the trusts to stimulate supplemental appropriations for projects and programs not currently funded by their agencies (endowments, capital expenses, ongoing operational support, etc.).

Another concern is the fear of legislative tampering. Will the funds placed in trust remain tied to their original intent, or will politicians at some future date decide they want to recoup and/or redirect those funds? Some see part of the answer here in the strategy of commingling private and public funds. Radich observes: “The use of private matching funds will, I predict, be a very strong disincentive for state legislators to appropriate state cultural trust funds for other purposes.” Still he cautions, “There is going to be a long gestation period and there will be failures. It's going to scare some people to death; but cultural trusts are not going away, and they can be expected to become a significant element in the state arts agency funding structure in the next twenty years.”

States are well aware of the risks involved. With the cultural trust movement still in its infancy, anything can happen. Cohn speaks for many of her colleagues when she states, “I know there are no guarantees. Sure our endowment could be changed or eliminated by the legislature. But I'd still rather make a case for more resources than keep struggling to maintain our current position.”

Whatever the risks, statewide cultural trusts are a growing part of the arts landscape. They have become a significant new strategy for maximizing all the funds dedicated to the arts and for revitalizing state arts agencies. For the nonprofit arts field in general, this is an exciting development that could mark a transition. As Sidford points out: “I think we are at an interesting evolutionary stage. We are going to see a lot of hybrid forms emerging responding to local opportunities and challenges. Public-private partnerships are here to stay because they maximize the assets of both the public sector and the private sector.”

Morrie Warshawski is a consultant, facilitator, and writer specializing in the arts who has written for the GIA Newsletter in the past. He can be found in cyberspace at www.warshawski.com.

Readers interested in learning more about statewide cultural trusts are encouraged to contact any of the state arts agencies mentioned in this article for more information. The agency directors expressed to Warshawski their eagerness to share information about specific experiences in their state. The National Assembly of State Arts Agencies is also a source of data about cultural trusts and other revenue generating mechanisms used by state arts agencies. See the “Recently Received” section of this newsletter for a short description of a recent NASAA publication, “Legislative Appropriations of State Arts Agencies.”