0.12 Chapter nine: the liabilities of nonprofit assets  (Page 18/5)

Chapter nine: the liabilities of nonprofit assets

It is widely acknowledged that The New-York Historical Society owns assets val­ued at more than $1 billion. The original watercolors for John James Audubon's Birds of America are said to be worth nearly $100 million. The Society's building and real estate have been appraised at a value of more than $50 million. The col­lection of Hudson River School paintings is worth many millions of dollars. The list goes on and on. These estimates raise one of the most common and most per­plexing questions asked about the Society: if its collections are so valuable, how can it possibly be in such severe financial distress?

The popular response to this question is to blame management and the board for irresponsible oversight of the Society. Although mistakes definitely have been made, it is important to recognize that there are deeper forces at work. One major source of confusion and misperception regarding the Society's situation stems from the unwitting use of financial terms and concepts developed in the for-profit sector to assess the standing of the Society and its collections. Unfortunately, terms used to describe economic ideas in the corporate realm, where the paramount objective is to maximize economic value, often do not translate directly into the nonprofit world, where objectives are more complex and cannot always be expressed in the one-dimensional terms of present values.

A perfect example of such a failing is the use of the term asset to describe the Society's collections. One accounting definition of an asset is "an object, claim [or] other right owned by and having value to an organization . .. either because it can be exchanged for cash or other goods or services... or because [it can be used]to increase the amount of cash or other assets at [the organization's] dis­posal."

The first test considers whether the item is fungible: can it be exchanged for money or other items of value? The majority of the Society's holdings fail this test. For example, in the case of gifts to the collections that have been made with donor-imposed restrictions, the Society is legally bound to retain them. To sell a restricted item requires a special cy pres ruling from the courts.

Moreover, even in the case of items in the collection that are free of such direct restrictions, the Society's ability to sell is limited by professional stan­dards regarding deaccessioning. In general, these standards are designed to dis­courage the sale of art objects. In the occasional instances when professionals would agree that the sale of a work is justified, standards mandate that the pro­ceeds be used only for new acquisitions. The pressure to adhere to these stan­dards is considerable; an institution that chooses to disregard them is regarded as a pariah and is unlikely to receive accreditation from professional associations. Although the Society raised approximately $16 million for its endowment by deaccessioning a portion of its collections in early 1995, this step was highly unusual and required special dispensation from the New York State attorney gen­eral's office and other interested parties.