Most if not all, arts organizations are able to articulate the intangible, cultural benefits of their arts programs to their community and to society. Defining the economic impact, particularly when seeking funding, can be a tougher task. Arts and cultural organizations achieve much more than their specific art form. Arts programming contributes to a community at many levels. Documenting the positive impact of an event/arts program is important at the time the organization is seeking a grant renewal or discussing funding opportunities with a private donor or corporate sponsor.
Direct and Indirect Economic Contribution
It is straightforward for an arts organization to identify the direct economic contribution made – all spending by visitors who attend an event, as well as wages, taxes and goods and services purchased in the community. A second positive impact, but more difficult to quantify is the indirect economic contribution related to spending in the local community by visitors and participants of an arts program, event or performance.
A new US study, “Arts and Economic Prosperity” issued by Americans for the Arts relates how arts and culture impact the economy. It begins to quantify how arts and cultural organizations leverage additional event related spending by audiences into the local economy. The objective is to try and identify for funders that arts is an important component to a local economy and a support to economic recovery. It firmly suggests that private donors, corporations and government funders need not feel that a choice exists between arts funding and other means of economic prosperity. Both are important as our Vice Chair John McKellar stated in “The Arts Mean Business”.
The research indicates that every attendee of an arts event generates local income, an average of $24.60 in addition to the cost of admission. Non-local visitors to an arts event spend more ($39.96 vs. $17.42 ) than local attendees. A thriving arts community supports residents who spend ‘local’ but also attract visitors who spend money and further support local economic activity. Comparable data at the community or national level is not as available in Canada. We notionally know this, and referencing the American findings may be a useful tool for arts organizations when making funding requests or speaking with their donors.
Behind all arts programs and performances, lies the challenge for arts organizations of having financial stability in a continuing volatile economy. Should this take the form of a ‘reserve’ or longer term capital fund (‘endowment’). A reserve is attractive as the fund has flexibility and remains available to the organization at the discretion of the Board. An endowment has a long term focus, providing the security of an expected income, available to the organization without restriction and governed externally.
For the Executive Director or Board member, it is critical to think through the purpose of long term funds, who will decide how capital is to be managed and accessed. As an organization, you should understand your donors, what motivates their decisions to provide annual financial support and longer term gifts. At the end of the day, the yield from an operating surplus, reserve or endowment provides the means to help you ensure artistic vision and creative programming can continue.
A new dynamic phrase is emerging in the USA – ‘change capital’. This refers to financial support that supports improvements in the quality or efficiency of the arts organization’s programs, supports growth or ‘right sizing’ of an organization and enables the organization to take risks, innovate and remain vibrant. Characteristics of change capital are three fold:
Funding is separate from regular earned or contributed revenue, and typically is received during a limited time frame
Flexibility – how the organizations spends the funding is of lesser importance than what it achieves – does the use allow the arts organization to enhance how arts programming is delivered or build efficiency into its operating model
Is the result increasing and reliable revenue that creates operating surpluses
Each form of capital – reserve fund, endowment and change capital have a place to help fund improvements in efficiency and quality of programming. They help to align the size and fixed costs of an organization with its sources of revenue (‘right sizing’) and are tools to help arts organizations take risks, be innovative and pursue new visions. A series of papers on capitalization of the arts that speak to this topic and illustrate how arts organizations put them to use can be found through the website of GrantMakers in the Arts – www.giarts.org – National Capitalization Project. All are worth reading, and the NonProfit Finance Fund paper titled “Case for Change Capital in the Arts” expands on the concept of change capital.
New Approaches to the role of ‘Capital’ in the Arts
June 04, 2012
One of the principal responsibilities of our Board is managing the investment portfolio for the Ontario Arts Foundation. We are long term investors (our investment time horizon is 5 to 10 years) and this drives our investment strategy. The Foundation looks to earn investment returns that will:
Create a stable flow of income for arts organizations and will fund awards and scholarships
Meet foundation operating expenses
Protect capital values against inflation
Making decisions on risk and asset mix strategy are critical to our achieving our investment objectives, particularly in today’s volatile political and economic climate.
Investment Policy Statement
Documenting investment strategy in a formal Investment Policy Statement gives our Board a framework for stating how investments will be allocated across asset classes (stocks, bonds). Investment policy creates the portfolio structure (how much is invested in equities – Cdn, US, Global ) and establishes a benchmark against which we monitor the investment performance delivered by our managers. It allows the board to know – has the portfolio achieved returns that meet or exceed our objectives.
Creating an investment portfolio starts with stating a goal or ‘required rate of return’ – returns we need in order to meet the objectives of the foundation – financial support for the arts. The Board establishes an asset mix that balances risk with the returns we expect to achieve. The asset mix is based on the level of risk the Board is comfortable with and drives the allocation of investments into equities, bonds and other assets. The foundation hires investment managers to manage the portfolio, invest in accordance with our investment policy and achieve results that we expect to add value.
We ask ourselves the question - ‘To achieve a particular portfolio return, how much risk is the Foundation prepared to accept?’ What is the appropriate level of risk we must accept to attain returns that meet our purpose. Every Board faces the challenge of bridging the gap between ‘required return’ and returns based on long term economic investment trends. We have learned there are no easy answers – higher returns imply taking on additional risk, lower returns mean less risk of loss but a lower investment return.
Recently, we updated our investment strategy and Investment Policy Statement. To increase the potential for higher returns, we introduced new asset classes (small cap equity and absolute return strategies). We are using different types of active portfolio management, but doing so in a way that diversifies our portfolio while lowering risk and volatility. This is an ongoing process – the Board will meet regularly with our investment managers and measure investment performance. Our objective is always to achieve investment results that meet our core objectives – protect capital, generate regular income and meet operating costs, and do so in a disciplined way.
Warren Buffett says it in this way,
“To invest successfully over a lifetime does not require an extraordinarily high IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework”.
Regular updates will be shared with arts organizations and private donors to keep you abreast of strategy, our manager’s views of the global economy and markets and investment results.