Key Takeaways
- Despite our initial rating actions following the onset of the pandemic, long-term credit quality held steady for U.S. cultural institutions.
- The majority of rated cultural institutions successfully offset lost or reduced revenue with expense cuts, federal support, additional fundraising, or a combination of methods.
- Balance sheets for cultural institutions improved in fiscal 2021 as a result of strong investment gains, although headwinds could be in store for fiscal 2022 and beyond given market volatility, inflationary pressures, and uncertainty around tourism.
Cultural institutions, a subsector of the broad and highly diverse U.S. not-for-profit sector, have shown resilience in navigating an exceptionally challenging two years due to the impact of the COVID-19 pandemic. During that time, many U.S. cultural institutions faced significant pressure to operating revenues derived from attendance and membership as they closed their doors for several months at a time. Some began re-opening during the latter half of fiscal 2021, leading to modest improvements in those operating revenues. At the same time, favorable market returns during 2021 fueled strong endowment and investment growth across the subsector, while, in some cases, emergency donor support helped buoy operations. Notably, fiscal year-end differs across this subsector, with the majority ending in June and December, and few others ending in other months throughout the year.
As of Nov. 15, 2022, S&P Global Ratings maintains 104 ratings in the not-for-profit sector and rates 33 cultural institutions that preserve and promote art, dance, music, etc. Following the initial onset of COVID-19 and the uncertainty about the economic fallout, we revised the outlook to negative from stable on 23 institutions, and revised the outlook to stable from positive on two others. Our outlook on three institutions was negative before the pandemic. Four institutions were excluded from the action due to low debt, very strong resources, significant liquidity, or a combination of the three factors. We assigned the initial rating for one institution after the group outlook revision.
Table 1
Rating Actions 2018-2022 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
2018 | 2019 | 2020 | 2021 | 2022* | ||||||||
Upgrades | 2 | 0 | 0 | 0 | 0 | |||||||
Downgrades | 0 | 0 | 3 | 1 | 0 | |||||||
Outlook revised to positive | 0 | 2 | 0 | 1 | 1 | |||||||
Outlook revised to stable | 1 | 0 | 2 | 15 | 8 | |||||||
Outlook revised to negative | 0 | 3 | 23 | 0 | 0 | |||||||
*As of Nov. 15, 2022. |
After speaking with management teams and reviewing operations following the initial impact of the pandemic, we believe these institutions have generally proven successful in navigating a difficult two years. We believe that unabated demand for the experiences that they provide, together with strengthened balance sheets and the recognition of operating efficiencies, will provide rating stability across the sector in the near term. While we expect that inflationary pressure could stretch consumers thin, which could dampen tourism and, in turn, reduce visits to museums and performing arts venues, these organizations proved resilient the past two years.
Chart 1
Table 2
U.S. Cultural Institutions--Median Sample Sizes | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
AAA | AA | A | BBB | Total | ||||||||
Number of institutions | 4 | 10 | 15 | 3 | 33 | |||||||
Total operating revenue (Mil. $) | 176.3 | 97.2 | 52.1 | 43.8 | 54.3 | |||||||
Total operating expense (Mil. $) | 183.9 | 81.3 | 40.8 | 26.5 | 51.0 | |||||||
Cash and investments (Mil. $) | 2,330.7 | 813.2 | 269.3 | 71.8 | 411.7 | |||||||
Adjusted expendable resources (Mil. $) | 1,761.7 | 635.4 | 171.0 | 60.7 | 302.3 | |||||||
Cash and investments to operating expenses (%) | 1,167.4 | 785.5 | 637.1 | 312.1 | 660.0 | |||||||
Cash and investments to debt (%) | 787.6 | 626.4 | 430.8 | 327.1 | 472.1 | |||||||
Expendable resources to operating expenses (%) | 1,154.1 | 744.6 | 364.4 | 155.7 | 576.8 | |||||||
Expendable resources to debt (%) | 685.7 | 687.9 | 280.3 | 276.5 | 341.9 | |||||||
Total debt outstanding (Mil. $) | 378.9 | 113.1 | 50.9 | 22.0 | 89.7 | |||||||
Note: We have not included medians for 'BB+ and below' given the small sample size of 1. |
Table 3
U.S. Cultural Institutions--Rating Actions | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 2019 | April 2020 | Current | ||||||||||||
Institution | Rating | Outlook | Rating | Outlook | Rating | Outlook | ||||||||
Alvin Ailey Dance Foundation | A | Stable | A | Negative | A | Stable | ||||||||
California Science Center | A | Stable | A | Negative | A- | Stable | ||||||||
Carnegie Hall | A+ | Stable | A+ | Negative | A+ | Stable | ||||||||
Cleveland Museum of Art | AA+ | Stable | AA+ | Negative | AA+ | Stable | ||||||||
Cleveland Orchestra | A | Stable | A | Negative | A | Stable | ||||||||
Eiteljorg Museum of American Indians and Western Art | BBB+ | Stable | BBB+ | Negative | BBB+ | Stable | ||||||||
Field Museum of Natural History | A | Stable | A | Negative | A | Stable | ||||||||
Lincoln Center for the Performing Arts | A+ | Stable | A+ | Negative | A | Stable | ||||||||
Los Angeles County Performing Arts Center | A | Stable | A | Negative | A | Stable | ||||||||
Mackinac Island State Park Commission | A | Stable | A | Negative | A | Stable | ||||||||
Metropolitan Museum of Art | AAA | Stable | AAA | Negative | AAA | Stable | ||||||||
Museum of Fine Arts Boston | AA | Stable | AA | Negative | AA | Stable | ||||||||
Museum of Modern Art | AA | Stable | AA | Negative | AA | Stable | ||||||||
Nelson Gallery Foundation | AA- | Stable | AA- | Negative | AA- | Stable | ||||||||
New York Botanical Garden | A+ | Stable | A+ | Negative | A+ | Stable | ||||||||
New York Public Library | AA- | Stable | AA- | Negative | AA- | Stable | ||||||||
Playhouse Square Foundation | BB+ | Stable | BB+ | Negative | BB+ | Stable | ||||||||
San Francisco Ballet | A- | Stable | A- | Negative | A- | Stable | ||||||||
Segerstrom Center for the Arts | A- | Stable | A- | Negative | A- | Stable | ||||||||
The Metropolitan Opera | A | Stable | A | Negative | BBB- | Stable | ||||||||
The Sterling and Francine Clark Art Institute | AA | Stable | AA | Negative | AA | Stable | ||||||||
The Walt Disney Family Museum | A+ | Stable | A+ | Negative | A+ | Stable | ||||||||
Whitney Museum of American Art | A+ | Stable | A+ | Negative | A+ | Stable | ||||||||
American Museum of Natural History* | AA | Stable | AA | Negative | AA | Stable | ||||||||
Philadelphia Museum of Art | A+ | Negative | A+ | Negative | A | Stable | ||||||||
Manned Space Flight Education Foundation | BBB- | Positive | BBB- | Stable | BBB- | Stable | ||||||||
The Art Institute of Chicago | AA- | Positive | AA- | Stable | AA- | Positive | ||||||||
Ewing Marion Kauffman Foundation | AAA | Stable | AAA | Stable | AAA | Stable | ||||||||
Kimbell Art Foundation | AA- | Stable | AA- | Stable | AA- | Stable | ||||||||
Saint Louis Art Museum | AA- | Stable | AA- | Stable | AA- | Stable | ||||||||
Smithsonian Institution | AAA | Stable | AAA | Stable | AAA | Stable | ||||||||
The Morgan Library & Museum | A+ | Stable | A+ | Stable | A+ | Positive | ||||||||
Museum of Fine Arts Houston** | AAA | Stable | ||||||||||||
*Outlook revised to negative in December 2020. **Rating initially assigned in September 2021. |
Closed Doors Led To Operating Pressure, But Institutions Proved Resilient
As the result of forced closures and cautious re-openings due to the elevated health and safety risks associated with the pandemic from spring 2020 to fall 2021, membership, admission, and auxiliary revenue fell sharply across the sector. Performing arts institutions were hit particularly hard as many cancelled either the entirety of or part of their seasons, leading institutions to recognize between 50% and 100% drops in attendance-driven revenues. While museums and ticketed venues fared better due, in part, to a greater ability to limit attendance without complete closure, the median decline in attendance-driven revenues from fiscal 2019 to fiscal 2021 was 49%. Although these revenues constitute a relatively small percent of total operating revenue across the subsector, the decrease still had an impact on median total operating revenue, which was down in fiscal years 2021 and 2020, falling to $54.3 million and $54.7 million, respectively, from the median of $63.9 million in fiscal 2019.
Chart 2
Just as performing art venues and museums recorded different revenue effects in fiscal years 2020 and 2021, expense reductions also differed across the subsector. Our data shows that, over the past two years, performing arts venues had greater success in reducing operating expenses due, in part, to a high level of variable costs relative to those of other cultural institutions. With very few performances through fiscal 2021, performing arts venues were incurring fewer expenses related to talent, design, marketing, sets, and music without, in many cases, having to furlough or lay off any full-time employees. Museums, however, have a high level of fixed costs due to ongoing facility maintenance, storage of art objects, insurance for those objects, etc., and therefore they found making meaningful reductions in operating expenses difficult over the past two years. Between fiscal years 2020 and 2021, museums reduced operating expenses by a median 7%, while performing arts venues cut expenses by more than four times that, nearly 31%. Given that there are twice as many museums in the subsector as performing arts venues, the median change in operating expense for all cultural institutions was closer to that of museums, at negative 11%. With museums and venues alike gradually re-opening in the past year, we expect operating expenses will steadily rise across the subsector. While some institutions found long-term operating efficiencies and savings from the pandemic, most issuers' expenses rose slowly due to inflationary pressures and increasing labor costs in fiscal 2022, with steady increases expected over the next few years.
Chart 3
Chart 4
Federal stimulus eased pandemic-related operating losses
While cultural institutions did not receive direct federal funding like higher education institutions did, many of them benefited from federal support in the form of the Paycheck Protection Program (PPP) and Shuttered Venues Operators Grant (SVOG), both of which helped institutions offset operating losses due to the pandemic. Seventeen, or just over half, of cultural institutions we rate benefitted from PPP loans, with distributions from the first and second draws totaling over $86 million. These loans, offered to institutions that employed 500 or fewer employees, helped cover payroll costs, mortgage interest, rent, and utility costs. Most, if not all, of these loans had been forgiven by fiscal 2022 year-end. Aside from PPP, 24 of our rated cultural institutions received combined support of $196.9 million from the SVOG program signed into law in December 2020. This program, unlike the PPP, did not have an organizational-size restriction and did not require loan forgiveness. It was crafted specifically to support cultural institutions such as live-music venues, theatres, museums, etc. to help retain staff and stay engaged with stakeholders through innovative methods such as virtual exhibitions and live-streamed performances. Depending on the timing of the approval, these grants were either recognized in fiscal 2021 or will be recognized in fiscal 2022. Our data suggests that 'A' rated institutions received the most support under both programs. While institutions benefitted from this federal support in fiscal years 2021 and 2022, future improvement in fiscal 2023 and beyond will depend more on a return to normalized operations.
Investment Returns And Donor Support Buoyed Balance Sheets
While management teams across the country were adjusting budgets, making difficult expense decisions, and searching for new ways to connect with their constituents, investment markets recorded one of the strongest years in recent memory in fiscal 2021, bolstering the balance-sheet resources of institutions across the subsector. Higher-rated institutions with large endowments and investment portfolios recorded greater investment gains on an absolute basis, and institutions across all rating categories saw substantial growth to cash and investments in fiscal 2021. Many institutions also sought out and received support from their donors for emergency fundraising, which both aided current operations and provided funds for institutions to use during recovery and for future projects. Combined, median cash and investments for cultural institutions rose to $411.7 million in fiscal 2021 from $324.2 million in fiscal 2020, while expendable resources jumped to $302.3 million from $169.1 million. With operating expenses down across the board, balance-sheet resources relative to operating expense grew nicely, although a return to normal operations coupled with a market downturn in fiscal 2022 could weaken these metrics over the next two years. Balance-sheet resources relative to total outstanding debt also improved partially due to the aforementioned market returns, but also due to, generally speaking, lower levels of debt outstanding across the subsector in fiscal 2021. While some institutions took advantage of the low interest rate environment to fund capital projects, others paid down lines of credit that had been drawn for precautionary measures shortly after the onset of the pandemic. We expect median debt outstanding will decrease as institutions continue to pay down defensive draws on their lines of credit, and as rising interest rates make the issuance of long-term debt more costly.
Chart 5
Chart 6
Chart 7
What We're Watching
COVID-19 resurgence
Demand for the various cultural offerings that these institutions provide remains strong as seen in the uptick in attendance, membership, and ticket sales at most institutions. However, most management teams remain cautious with their budgeting given the potential of a COVID-19 resurgence and its effects on tourism, demand, and revenue more broadly. International tourism, a strong driver of attendance at some institutions, has been slow to rebound.
Inflationary pressures and an uncertain economic outlook
In addition, management teams are also aware of the pressure that the current inflationary conditions can have on the average consumer budget. These pressures have already caused consumers to pull back on discretionary spending, with recent retail sales data suggesting that consumer spending has begun slowing in response to higher prices. While a drop in gasoline prices have provided some respite to consumers in the short term, we believe household savings have limited ability to absorb higher prices for an extended period. We expect that inflationary pressure will continue to stretch consumers thin, which could dampen tourism and, in turn, reduce visits to museums and performing arts venues. (See "Economic Outlook U.S. Q4 2022: Teeter Totter", published Sept. 26, 2022, on RatingsDirect, for more information.)
Market volatility
While strong investment gains bolstered the balance sheets of most institutions in fiscal 2021, market volatility in fiscal 2022 and beyond could diminish some of the growth. However, most institutions have well-diversified investment portfolios and good cash management practices therefore we do not expect liquidity will be a risk factor.
Digital and online programming
During the pandemic, many institutions successfully offered online and digital programming, enabling them to reach audiences they might not have otherwise. Over the next few years, we believe that online exhibitions and performances could remain a way to strengthen the brand of the institution and attract new audiences. For museums, we believe that investment in the digital art space could become increasingly prevalent. The non-fungible token (NFT) market, for example, swelled to nearly $25 billion in 2021 and, while few institutions have shown interest in entering the NFT market to date, we believe more could embrace this form of digital art in the future.
Increasing unionization and labor-market tightening
In recent years, curators, conservators, educators, and other staff at some of the largest and most-prestigious museums across the country have joined or created unions to drive change at their institutions. While many of the institutions we rate have longstanding unions and have been successful at negotiating new contracts over the years, we believe that there could be increased operational, financial, and reputational risk should institutions fail to reach consensus in future negotiations particularly given the tight labor supply across the U.S. In our view, it has become more difficult, but more important for institutions to attract and retain qualified employees.
This report does not constitute a rating action.
Primary Credit Analyst: | Nicholas K Fortin, Boston + 1 (312) 914 9629; Nicholas.Fortin@spglobal.com |
Secondary Contacts: | Stephanie Wang, Harrisburg + 1 (212) 438 3841; stephanie.wang@spglobal.com |
Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com | |
Laura A Kuffler-Macdonald, New York + 1 (212) 438 2519; laura.kuffler.macdonald@spglobal.com |
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