By Jamie Stone

Law360 (June 29, 2020, 5:23 PM EDT) --

Jamie Stone

The COVID-19 pandemic has shattered many economic sectors, not the least of which is the arts industry — to the tune of an estimated $5 billion to date. Attendance at American art institutions has dropped by almost 62 million — that's about 1,000 people per organization.

Over 50,000 workers have been laid off, and more than a million more are furloughed. Only 58% of arts organizations report that they are confident they will survive.

While art museums across the country have closed their doors, two avenues for much needed funding to cover operating expenses may lie behind the proverbial castle walls: museum endowments and the sale of works of art from a museum's existing collections — a practice known as deaccessioning.

The difficulty with using endowment money and deaccessioning proceeds is that these funds typically are restricted to use for specific purposes, not including a museum's general operating expenses. However, the board of trustees of the Association of Art Museum Directors, or AAMD, has recently suggested a deviation from this norm.

In so doing, AAMD also provided guidance on the steps that museums and their boards of trustees should take in accessing these much-needed funds. In an April 15 press release, the AAMD board of trustees announced that it passed resolutions providing that the AAMD will not sanction any museum or museum director for using the following types of funds to cover a museum's general operating expenses:

• The income (not principal) from restricted endowment funds or trusts;

• The principal or income from trusts held by third parties in support of the museum; or

• The income (not principal) from proceeds placed in a trust from the sale of deaccessioned art.

In addition, no AAMD sanctions will result from a museum using any or all of the proceeds from the sale of deaccessioned art to pay for "the direct care of the museum's collection."

These resolutions signal a temporary divergence — the resolutions are valid through April 10, 2022 — from long-standing guidance around museums' use of these types of funding, and in particular, the historical adherence to the principle that proceeds from deaccessioned art can only be used to acquire new works for the museum.

In 2018, for example, the AAMD issued sanctions against the Berkshire Museum and La Salle University Art Museum, prohibiting each of the AAMD's 243 member institutions from lending or borrowing works of art to either museum, or otherwise collaborating with either museum on exhibitions. The sanctions were a result of the Berkshire Museum's deaccessioning and sale of 13 works through Sotheby's for approximately $15 million, and La Salle University's deaccessioning and sale of several works through Christie's for approximately $2 million.

Both museums publicly announced their plans to use the proceeds for purposes other than the acquisition of new works of art, including La Salle University's indication that it would use the proceeds for educational programs.

The AAMD board acknowledged that the organization does not have authority to actually approve the use of restricted funds for unauthorized purposes — as the terms of many museum trusts and endowments will limit the use of funds to specific purposes — and that all applicable legal requirements around the use of restricted funds and the sale of deaccessioned art continue to apply.

However, the AAMD board's resolutions were intended to encourage donors and legal authorities to provide similar flexibility, to help museums weather this COVID-19 storm.

One major institution on the American art scene — the Metropolitan Museum of Art — has already demonstrated an inclination to turn to nontraditional sources of funding in light of the current crisis. After closing its doors in mid-March, and projecting a $100 million loss through July, the Met announced in late April that it had created an emergency fund of about $50 million — a "spinoff fund" of "unrestricted funds that would typically be used for acquisitions, programming, and educational initiatives."

Whether and to what extent this spinoff fund was spurred on by AAMD's announcement of its freeze on sanctioning is unclear. However, at a minimum, this move shows that even the largest U.S. art museum is turning to nontraditional sources of funding during these financially difficult times.

In order to take advantage of the types of funding addressed in the AAMD press release, museum boards of trustees must take care to implement appropriate policies, in order to comply with all applicable law — including the Uniform Prudent Management of Institutional Funds Act, enacted in almost every state. Where necessary, boards also must obtain consent of donors and trustees.

In order to use the proceeds from deaccessioned works of art for the direct care of a museum's collection, per the AAMD, the museum's board of trustees must approve a publicly accessible policy outlining what expenses it considers to be for direct care.

An American Alliance of Museums 2016 white paper provides helpful expansion on the meaning of "direct care," which includes enhancing the "life, usefulness or quality" of existing museum collections — e.g., restoration and preservation of objects — often through strategic investments, planning for collections and having a physical impact on items in the collections.

On the other hand, expenditures that have an institution-wide impact not only associated with collections, are quick fixes for budgetary gaps, or are normally considered part of the museum's operating expenses are less likely to be considered direct care, according to the white paper. It says that the policies adopted by museum boards should clearly draw "on the ethical principles underlying the direct care of collections as well as the ethics and standards applicable to the museum's discipline" and on"the process the museum will follow to determine how funds will be used."

The white paper also says such policies should detail which museum staff and board members will be involved in making decisions around the use of proceeds from deaccessioned works. Further, the museum's board should direct that these funds be placed in a segregated account. The board should also approve a collections management policy that addresses, among other things, the applicable standards for deciding whether to deaccession works from collections.

In the case of restricted funds in endowments or trusts, use of these funds for general operating expenses likely requires not only board approval, but also consent from donors and trustees, depending upon the terms of each such endowment or trust. Additionally, the state's attorney general may be required to be notified, pursuant to the Uniform Prudent Management of Institutional Funds Act.

The AAMD has also directed that, where possible, in connection with both the use of restricted funds and the use of proceeds of deaccessioned works, museums should consult with the applicable donors or trustees, and should also keep record of the funds taken from each separate source, and of how those funds were used.

Tapping into restricted funds is not a permanent solution for museums struggling to balance the books. But unprecedented times require an extraordinary response. Drawing on museum endowments and proceeds from deaccessioned works may well provide short-term solutions to museums struggling with the COVID-19 crisis — provided the museums and their boards do so in a way that meets all legal and ethical standards.

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Jamie Stone is an associate at Womble Bond Dickinson LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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