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    Court Says Cleveland Museum Can Dip Into Acquisition Fund Income

    A recent ruling in the Probate Court of Cuyahoga County, Ohio, allows the Cleveland Museum of Art to tap income from four endowment funds restricted to the purchase of art in order to ease a financial squeeze caused by a $350 million expansion and renovation for which the museum hasn’t yet raised all the money

    CLEVELAND—A recent ruling in the Probate Court of Cuyahoga County, Ohio, allows the Cleveland Museum of Art to tap income from four endowment funds restricted to the purchase of art in order to ease a financial squeeze caused by a $350 million expansion and renovation for which the museum hasn’t yet raised all the money needed.

    The judgment entry, written by Judge Anthony J. Russo, allows the museum to deviate from the original terms of the four endowment funds. The ruling states that the diversion of art purchase funds can last as long as it takes the museum to finish paying service on tax-exempt bonds, which could be decades. But the ruling imposes a total cap on withdrawals of $75 million.

    Although the ruling doesn’t guarantee that museum trustees will vote in December to go ahead with the second major phase of the now half-finished expansion project, they regard Judge Russo’s decision as a major step forward.

    “I feel very good we have gotten this behind us,” said Michael Horvitz, chair of the museum’s board of trustees. “It’s one of a number of things that need to fall into place in order for us to feel confident we can go forward.”

    The museum needs access to the additional income from its endowment because it is in a cash-flow crunch with its expansion project, intended to increase gallery space by more than 50 percent. Trustees are confident they’ll be able to raise the $350 million they need to finish the project, but doubt they’ll have everything in hand by 2013, their construction deadline. So far, the museum has raised $212 million, leaving a $138 million gap to be filled in the near future if work is to stay on schedule.

    If the museum stopped or slowed down their project, it would only increase the ultimate cost, making it even harder to raise the necessary money, trustees said. Access to the endowment funds will help the museum qualify for lower interest payments on $90 million in outstanding debt from tax-exempt bonds issued in 2005, and keep money flowing for construction while the museum waits for the pace of fundraising to increase.

    The museum’s trip to probate court has stirred controversy among critics who feel the decision could encourage other museums to deviate from donors’ wills. Eric Gibson, the Leisure and Arts features editor of The Wall Street Journal, wrote a column in that newspaper on Sept. 15 criticizing the Cleveland Museum of Art for “communing with the dead,” based on his interpretation of the museum’s argument in court that if the original donors of the four funds were alive today, they’d agree to divert income for construction temporarily because expanding the museum would enhance its ability to acquire, exhibit and conserve works of art.

    Judge Russo, however, agreed with that argument, based in part on a ruling in the museum’s favor in 1955, when the probate court allowed a similar temporary deviation from the terms of art-acquisition endowment funds to pay for construction. Janet Landay, executive director of the Association of Art Museum Directors, said that the Cleveland museum’s circumstances are unique and do not set an example for other institutions.

    “We believe it is not precedent-setting because it is particular to this particular issue, but we do hope that museums will always honor intentions of their donors,” she said. “There’s no question there is a central rock on which museums are based, which is the bond between the museum and the donor.”

    In the case of the Cleveland museum, Landay said, the AAMD believes the institution honored the will of donors by seeking permission in probate court to divert the funds. Ohio attorney general Richard Cordray and trustees from Key Bank, which administers two of the funds in question, supported the museum’s position.

    The museum originally asked to withdraw the $75 million in income within 10 years, but the judge’s ruling extended the payout period in an effort to limit the amount of income that could be spent for construction in any one year. In addition to the total cap of $75 million, withdrawals cannot exceed the greater of either 49.99 percent of the income from the funds in the most recent fiscal year or $5.49 million. Judge Russo imposed the cap to ensure that a majority of the annual income “would continue to be allocated solely for the acquisition of artwork, thereby keeping intact the primary function of each said Charitable Fund.” If officials believe they need to exceed the cap, the museum must notify the court, which reserves the right to review the appropriateness of the request.

    The Cleveland Museum of Art’s endowment peaked at roughly $821 million in 2007, before falling to near $500 million earlier this year. It has since rebounded to $558 million as of June 30. Historically, half of the income from the endowment has been restricted to operations, and the other half to art acquisitions.

    Landay said the Cleveland museum considered its financial dilemma from “all angles” and came to the conclusion that the deviation “was in the best interests of the institution.”