While the mandate of the Ontario Arts Foundation is to invest in perpetuity, i.e. for the very long term, we recognize that arts organizations, like any organization cannot exist in perpetuity based solely on past success. To continue to deliver sustained arts programs, organizations need to adapt and respond to change in their operating environment.
She observes that the justification for the arts in western culture seems to have shifted too far in the direction of ‘measurement’ – arts as paying its way, or contributing to economic growth. It is absolutely true that the arts are strong economic contributors, but have we lost, at the political level, sight of ‘culture for sake for culture’s sake’?
Diane identifies five ways arts organizations can work to transform in a positive way and continue to engage with their communities:
Let the community back in
Practice radical hospitality
Be the kitchen table. Be the campfire
Focus on impact rather than size. Form covenants rather than contracts
Create scaffolds of meaning-making rather than money-making
Each intriguingly named theme is accompanied by examples of organizations being creative and transforming themselves, or how they practice their craft and engage with their audience.
To our minds, taxing endowment is very short term thinking. Lately, US media and politicians have called for taxation of the larger endowment funds. As lawmakers look for sources of funds amid declining tax base at the local level, along with rising tuition costs, the presence of large, successful and growing university endowment funds have become an enticing target.
Most endowments, including the Ontario Arts Foundation’s, saw the market values of funds under their stewardship decline during the 2008 economic crisis. Legislators and the media seem to have forgotten the impact. Endowment distributions dropped or in many cases, had to be suspended for a year. Since that time, a combination of improving security markets over the last 5 years, sound investment management and new donations have seen the aggregate value of funds held in endowments grow significantly. Lawmakers in states where the large universities are located ( Harvard, Yale, Princeton ) are making statements that the school endowments should be ‘forced’ to make mandatory payouts to reduce education/tuition costs or help offset deficits in education budgets.
Not surprisingly, we are not supporters of this for several reasons:
Recent history of a time when the market value of endowments declined below the original principal, resulted in an inability to make the annual distributions that the arts organizations we support rely upon. Our investment strategy looks to mitigate that risk by growing the capital and maintaining a reserve to ensure we are able year over year, to make distributions. But no Board or investment manager has control over global markets.
Taxing investment profits, or challenging tax exempt status of endowments will mean that donors intending to provide long term support to an organization may use other vehicles, or not make the gift. One of the advantages of an endowment is the pooling of multiple funds to lower investment costs. Taxing an endowment and driving donors elsewhere may increase costs, which impacts the amount available for distribution.
What is forgotten in the dialogue is that many individual endowments, collectively managed by the foundation, or a university have very specific purposes (i.e. fund an arts award). The governing organization does not have the ability to re-direct the capital or income to the purposes external bodies are suggesting.
Endowments are an attractive tool for generating sources of income that are separate from government funding, operations/arts programming. The stability of returns is an important part of an organization’s finance’s.
Taxing an endowment may be attractive to the media or a politician, but it truly is short term thinking at its worst.
At the beginning of each year, the Foundation Board meets to review investment performance and decide on the payout percentage. This determines the actual income arts organizations holding endowments with the OAF will receive. What does the Board consider in making this decision?
Market Growth The majority of endowments we administer are permanent. The original capital can never be paid out and income is based on returns (cash income and market appreciation). So rule # 1 is to invest the portfolio so that annual returns increase each fund’s value, which creates income available to pay out. Our investment objectives are to earn consistent returns that support annual distributions, to preserve the capital in real dollar terms (protect against inflation) and cover investment management and our administration expenses. We invest for the long term, and aim to be able to pay out 3 to 5% returns consistently. We seek returns that exceed 5% over a 5 year period.
The Board looks at investment returns for the past year ( 2015, 7.2% ) and returns for 5 years ( 9.0% ) and 10 years ( 6.7%). This confirms that market growth is well in excess of our policy objective and that the difference between the original endowed value and current market is growing. We want that difference to be going up each year. As that happens, the board can with confidence strike a payout percentage that is stable and consistent.
Consistency A consistent income year over year is helpful for arts organizations in setting their operating and program budgets. We believe that consistency is more important than maximizing a payout in a given year then having to lower it in a future year. We recognize that arts organizations need the income from their endowments, and we try to pay as much as we can while being mindful of the long term.
Another way we look for stability is to base the distribution rate on the average market value of the funds over the previous three years. This is helpful both as markets grow year over year or experience a decline.
Investment Strategy The Board is mindful of future return expectations, which is reflected in the asset mix strategy and decisions on investment managers. As a long term investor, our investment strategy has a bias towards equities, and we choose managers having a long term investment focus. That focus examines economic themes emerging across the world, and identifies businesses that will benefit from these themes and are well managed to excel in their particular business and marketplace. These strategies mitigate short term volatility and position the Foundation for sustained long term growth. We believe we are achieving success in this regard. The OAF investment portfolio has achieved higher long term returns with lower volatility than most managers following a similar strategy. The OAF annualized 5 year returns are approximately 10% vs a 7.6% from a universe of comparable balanced portfolio managers.
Lastly, we seek returns that are decent versus excessive as we strive for that long term continuity, and avoid significant year over year variations in returns.
The debate at the Board is always lively, as it seeks to balance a sustained, increased amount each year, while also marshaling resources for the long term in order to deliver stability. For 2016, all factors resulted in a decision to maintain a 4.5% payout. Ontario arts organizations will receive just over $3.0 million in endowment income this year.