Capitalization Workshops

Grantmakers in the Arts began work on capitalization in 2010. Ever since then we’ve debated not using the word “capitalization,” but it has prevailed. In our work, the term is synonymous with financial health and the resources needed to meet an organization’s mission. In 2010, GIA published recommendations for grantmakers regarding actions they could take that would improve the undercapitalized nature of the nonprofit arts sector.

In 2011, GIA commissioned financial and management consultants TDC in Boston and Nonprofit Finance Fund (NFF), New York, to create a daylong workshop to be presented around the country. These Conversations on Capitalization and Community go beyond national recommendations to local discussions about how all organizations, regardless of budget size, can adapt to change and be sustainable. By the end of 2013, we will have held capitalization workshops in thirteen cities for approximately 300 grantmakers.

We asked four participants of the workshop to describe their reactions and, in some cases, subsequent actions after participating in the conversation. These funders are geographically and institutionally diverse. As our capitalization trainers like to say, “Capitalization principles are universal, but funding solutions are local.” Working with these principles, local funders can inspire transparent conversations about capital and assist their grantees to become healthier and more productive.

Capitalizing Organizations and Communities

Tere Romo

As part of my research into capitalization, I read the Nonprofit Finance Fund’s report Change Capital in Action: Lessons from Leading Arts Organizations (2013). The report details the findings of the Doris Duke Foundation’s Leading for the Future, an “experimental learning program designed to address the mis-capitalization of nonprofit performing arts organizations by providing them with access to flexible funds to support their adaptability.” I was struck by how inclusive this program set out to be, with its national call for nominations and a selection process based on artistic quality and “the potential of [applicants’] preliminary plans.” But it soon became apparent that the ten organizations chosen to participate did not span the “wide range of aesthetic styles, organizational structures, scale and more” as envisioned by the program organizers. In fact, it became clear to me that the descriptors used throughout the study (e.g., “leading performing arts organizations,” “anchor institutions,” “artistically excellent organizations,” and “outstanding cultural institutions”) have become code for large-budgeted organizations.

The NFF report and the recent GIA-sponsored capitalization meetings left me with many questions, which formed the basis of several discussions and a GIA session at the 2012 conference with my colleagues and thought partners Ron Ragin (Hewlett Foundation) and San San Wong (Barr Foundation). Why do we continue to focus on capitalizing the arts organizations with the most resources (endowments, donors, giving boards, etc.)? Why are we not investing in small and midsize organizations, which also produce high-quality programming, serve increasing audience members, provide a home for artistic innovation, and generate tremendous social capital, but have fewer financial resources? What would it mean to take a more holistic, ecosystemic approach to capitalization, one that recognized that artistic excellence, anchor status, and civic importance are not the purview of organizations with a large budget or Western European art forms?

The San Francisco Foundation’s new Arts and Culture Program funding guidelines try to answer some of these questions and incorporate lessons learned from capitalization research papers, meetings with other funders, and the foundation’s mission as a community foundation serving five Bay Area counties. With an overall goal of supporting artistic excellence and cultural participation as a means to building healthy communities and celebrating ethnic diversity, we will target our funds to small and midsize organizations with budgets between $10,000 and $2 million. Grantees will receive larger grant amounts and general operating support, both cited as necessary tools for capitalization.

We will also delve deeper into capitalization by launching an initiative to support fifteen organizations that serve as artistic anchors and/or neighborhood cultural hubs. Along with larger grants for general operating support, they will receive multiyear funding and technical assistance. In partnership with our philanthropic services staff, we will engage our donors as partners in building individual support for each of them. Many of these undercapitalized arts and culture institutions serve emerging artists and a diverse population. Donor support to these organizations would assist not only them but also the artists and the neighborhoods they serve, as well as the larger Bay Area arts ecosystem. The proposed impact of this approach will be to strengthen the organizational capacity of a vulnerable arts sector and assist in the stabilization of healthy communities through the arts. Equally important, the initiative will raise the profile of a group of organizations that, as a result of their location and mission, tend to be chronically underresourced.

According to Claudine Brown, former program director, Arts and Culture at the Nathan Cummings Foundation, “At this moment in the history of the United States, as we seek to define the cultural practices that will unite and sustain us over time, the arts and culture community has a powerful role to play.” As a result of the economic situation and funder priorities, neighborhoods are in danger of losing excellent organizations that provide a voice for underserved and neglected communities. We believe our efforts to capitalize our small and midsize organizations provide an opportunity to support crucial organizations that serve as intersections of artistic excellence, community access, and social justice.

Enlightenment from GIA’s Capitalization Workshop

Jeff Prauer

The Metropolitan Regional Arts Council (MRAC) serves the seven-county Twin Cities metropolitan area and is one of the eleven regional arts councils that work in partnership with the Minnesota State Arts Board to help ensure that state arts funding reaches all eighty-seven Minnesota counties. In FY2013 we will award approximately $3 million in more than 400 grants, all of which require a cash match.

We don’t provide general operating or unrestricted support — although most of our grants are for what arts organizations produce, and administration and other overhead can be included in their budgets, so it’s providing funding for their art-producing operations — and we don’t require submission of a balance sheet, so we are not in a position to drive capitalization through our grantmaking.

As you might imagine, we often talk with people who run these organizations who are grateful for the opportunity to compete for state funding but who also ask us about the secret to achieving sustainability. We don’t have that secret, and as far as I know there isn’t one.

It seems to me that neither the opportunities nor the challenges of capitalization are unique to arts groups of any particular size. I often remind people that the conversations within a theater company whose office may be the artistic director’s kitchen table are remarkably similar to the conversations that occur in a major orchestra’s board room, as we’re seeing with the salary and other expense cuts being sought by orchestra administrators around the country. Despite large endowments and legions of ticket buyers and donors, many large arts organizations find themselves in very unenviable positions.

That said, a few key issues remain unresolved for me:

• We provide free workshops for our constituents on a broad range of organizational development topics, such as marketing, fund development, governance, and finance (our instructors in finance are well versed in and proponents of capitalization approaches). But I often wonder how many people, who just told us in their post-workshop survey how much they learned, will actually put into practice what they learned, and how many will conclude that capitalization is only an academic theory.
• Even if an organization can change the way it seeks, manages, and allocates resources, I wonder how challenging it will be to make the case for capitalization to funders and other contributors who are just as squeamish about surpluses as they are about deficits.
• Small arts organizations are often driven and run by artists, not by administrators. Consequently there are varying degrees of comprehension and skills when it comes to financial management, but even among organizations driven by artists who clearly understand money, there is often a tendency, as part of their DNA as artists, to just put any extra money into the next artistic endeavor.
• Arts organizations are often asked in grant proposals (although not MRAC’s) what they see as the biggest challenge or opportunity before them, other than money, because it’s assumed that every-one will say money. So, with capitalization in mind, it should be okay for them to say their biggest challenge is money.

I admit to having had some skepticism about the recent emphasis on capitalization that GIA has made at its conferences and in its publications. Kate Barr is executive director of the Nonprofits Assistance Fund in Minnesota and a member of the board of directors of the newly independent nonprofit Cultural Data Project. I love what she said about capitalization, which is that we should step back from talking about capitalization and just get groups to address financial health. But the workshop presented by GIA, the Nonprofit Finance Fund, and TDC in Minneapolis last fall convinced me that there is an important and commonsense approach toward a sound nonprofit arts business practice.

Thinking about Capitalization

Beth Feldman Brandt

As the resident organizer of Delaware Valley Grantmakers’ Arts Funders Roundtable, I was interested to welcome GIA’s Conversation on Capitalization and Community workshop to Philadelphia. To be honest, however, it seemed that any conversation about capitalization would be intellectually stimulating but not particularly relevant to my foundation’s work. The Stockton Rush Bartol Foundation provides grants of $5,000–$10,000 (most are around $5,000) to small and emerging arts and cultural organizations with an emphasis on in-depth arts education and community-based arts programs. I figured (1) our grantmaking is not large enough to affect an organization’s capitalization strategies, and (2) our grantees are in no position to deal with issues of capitalization when they are barely able to meet their weekly payrolls. I was wrong on both counts.

What We Were Doing Right: The Bartol Foundation has a long history of giving general operating support, a key component in helping groups make their own decisions about how to designate their grants to best serve their organizations. General operating support gives them the ability to set aside funds for a cash reserve, future investments, or program adaptation.

After the 2008 crash, we revised our guidelines to encourage applicants whose primary work falls in our priority areas to apply for general operating support, and we expressed our understanding of the need to return to their most effective core programs. We explicitly told applicants not to invent new projects just to apply for our grants. In short, if we trust you enough to give you a grant, we trust you enough to use the funds where they are most needed.

What I Understand Better Now: I have a better understanding that even small organizations can put some money in a“savings account” as a capitalization strategy and that most organizations are a long way from needing an endowment. I also understand that we need to reward groups that are revisiting their business models.

Recently, a mission-strong, community-based organization took a four-month hiatus from programming when it realized it ran out of money every spring, limped along in panic mode for the summer, and pulled out some last minute fund-raising or cost cutting to balance the budget at great psychic expense to everyone. Not only did we give them a grant while they were regrouping, we gave them more than usual as a signal that we valued their willingness to reenvision their organizational structure. The executive director said that when she opened our award letter, it made her cry with relief that someone understood what they were trying to achieve. What has emerged is an organization that has affirmed its mission but found a more sustainable way to achieve that mission.

What Still Gets Me Frustrated: Imagine a nonprofit has responsibly set aside a cash reserve in case a big funder pulls out or to invest in a new initiative. Beyond a cover letter on their audit, there is no way for their financial statements to reflect that the use of cash reserve funds was not in response to an uncontrolled deficit but rather the outcome of good management practice. A deficit shows up as a deficit on most “fill in the blank” forms they need to complete for funding.

I have also seen colleagues still give grants for special projects that only fund consultants, not organizational staff members. As one arts administrator said to me, “If I fired my staff and hired them back as consultants, then I could pay them.”

What We Are Doing Differently: I admit that we were guilty of looking at groups with a cash reserve and thinking they didn’t really need our grant; instead we funded organizations that were hanging by a thread financially, thinking they had greater need. During our 2012 grant review, no one was allowed to say, “They don’t need our money.”

Because everyone needs our money. And there will always be more need in the community than any of us can fix with even the largest foundation grant. So we can all be more aware of how we can help groups be around for the long haul and help them achieve the resiliency our community needs.

Capitalization and Advancing the Arts

Kris Tucker

In its role as a public-sector funder in a state with relatively low per capita arts funding, ArtsWA is in a weak position to resolve the financial status of any arts organizations, directly or indirectly. In fact, a series of legislative cuts to our funding over the past four years has prompted us to discontinue general operating support grants. Instead, we steer our grant dollars into projects, partnerships, and initiatives across a large, diverse, and complex state.

As a follow-up to the 2010 National Capitalization Project, the Nonprofit Finance Fund in 2012 found that Seattle arts organizations of all sizes have “low or negative median true liquidity.” The largest organizations (with budgets greater than $10 million) have the most fragile finances.

The Seattle Capitalization and Community Conversation took place in May 2012, at about the same time we were launching a one-time grant cycle, funded by the Wallace Foundation as part of our four-year Arts Participation Leadership Initiative, to incentivize innovations in arts participation. The grants supported thirteen short-term experiments to engage audiences. A year later we have the documentation of the results of those investments (see it at www.arts.wa.gov). Among the key findings: “Enthusiasm for a project often overrides a reasonable assessment of what is required.”

Enthusiasm for a project has been a key factor in the construction of numerous organization-specific nonprofit and public-sector cultural facilities across the state, resulting in museums, concert halls, heritage centers, and performance stages that are far more elaborate and expensive than those of twenty years ago. The capital campaigns initiated to complete these projects have attracted generous donations, as well as public support for the construction, but not always the interest in supporting the longer-term operational and programmatic needs of the organizations responsible for the facilities. New facilities increase the need for funds. I am part of many discussions in which it is acknowledged that parts of the sector are overbuilt, yet there is no clear agreement about what that means, or how it matters.

Every funder has its authorizers and its geography: our authorizers are elected officials and the people of Washington State; our geography is defined by state borders. Our mission and mandates require that our funding reaches throughout the state and provides measurable public benefit. With limited public funding for the arts, we debate whether it is more important to sustain established organizations or to support fresh new approaches. Can a small organization pull off a big idea? Will our relatively small funding make a difference in a big organization? If an application doesn’t show commitment from other funders, is our funding likely to extend the unsustainable, or are we helping a good idea find its time? How to balance enthusiasm with capacity?

All this could put a bad light on project funding. As one funder said, “Project money is just fine if it is for something the organization is already doing.” But our arts education grants prove otherwise: they are designed to incentivize and support policy-informed partnerships that are proving to have real impact in communities across the state. These partnerships weren’t happening previously, and more kids have better arts education now because of our investments.

But we need to be realistic about our expectations, and consider how to support “right sizing” a project. We instruct our panelists to view “applicant funds” as a positive, not as evidence that “they don’t need our grant.” We talk frankly with our panelists about the implications of funding more organizations at smaller amounts, compared with providing a smaller number of larger grants. When funding less than a full request, we may ask an applicant to revise their proposal accordingly. Through our grant guidelines — and through conversations like this — we also can lead (or push) the field in the direction of better financial planning.

The evidence of frail financials among arts organizations is deeply troubling. But let’s not confuse the importance of strong nonprofit arts organizations with the broader agenda of advancing the arts. Nonprofit arts organizations are key players in arts participation, healthy communities, arts education, and tourism. But arts participation is changing, and we also need to incentivize new approaches to reach, engage, and serve different people and in different ways. With enthusiasm? You bet.