The financial crisis and a new round of deaccessioning debates

by Sheppard Mullin Richter & Hampton LLP
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When public institutions are suffering from financial deficits, one question is usually raised: can they sell art to survive? In the museum world it is generally understood that you are to deaccession art only if the work is duplicative of another work in the collection, or for similar collections-related reasons, and the sale proceeds are used exclusively for collections activities. Therefore, for example, you cannot seek to sell art to obtain sufficient liquidity to meet any financial obligation, or make debt service payments. There is little government regulation on deaccessioning (for example, the NY Board of Regents has the power to provide limitations on deaccessioning on New York museums chartered after 1890). However, private institutions such as the American Alliance of Museums (“AAM”) and the Association of Art Museum Directors (“AAMD”) have adopted for their members certain policy guidelines on deaccessioning. Their members are subject to sanctions such as censure, suspension and/or expulsion in the event they do not follow these guidelines.

This is the debate currently happening in the city of Detroit, which has recently filed for bankruptcy, and countries in Europe such as Spain, where steep cuts in its budget have affected state-sponsored museums such as the Prado museum.

As for Detroit’s bankruptcy, some have argued whether the Detroit Institute of Arts (“DIA”) should sell its artwork, yielding an estimate of $2 billion (the city of Detroit has a $20 billion debt). The DIA has 600,000 annual visitors and a collection of approximately 65,000 artworks. Michigan’s attorney general, Bill Schuette, has stated that DIA’s artworks were ‘held in trust for the public’ and could only be sold for the purpose of acquiring new art. Others have claimed that the collection should be sold to refrain Detroit’s retired employees from losing part of their pensions.

From a bankruptcy law perspective, municipalities, unlike businesses, cannot be forced to liquidate their municipal assets (the concept which provides that if a debtor wishes to reorganize it must provide creditors with at least as much as they would get in liquidation does not apply to municipalities). A municipal restructuring plan cannot be approved unless it complies with state law, and as mentioned above, Michigan’s attorney general issued a non-binding opinion stating that the artworks were held in trust for the citizens of Michigan, and thus cannot be sold.

As for Spain, the Spanish Official Gazette has published the annual statements of the Prado museum and one thing is clear: art is not immune to Spain’s recession. Patronage from the Spanish government had a 28% drop (from approximately €6.6 million to €4.8 million) in the last 2 years. However, rather than deaccessioning, this drop has been set off by increasing its international loans. Therefore, the museum authorities allocated these foreign loans receipts as deemed patronage, and this has allowed the museum to stabilize its balance sheet. The annual statements report that the main private sponsors for temporary exhibitions were Axa, Telefónica, BBVA and La Caixa, who contributed a total aggregate amount of €625,000. However, the statements do not specify how much the museums actually invested in setting up such temporary exhibitions. The Contemporary Art Institute (Instituto de Arte Contemporáneo) has been criticizing the lack of transparency in museums and art galleries that receive sponsorship or other type of financial assistance from the state. This Institute has created standards of best practices for contemporary art museums (the “Standards”), which attempt to follow the path of the AAM’s National Standards and Best Practices for U.S. Museums (see http://www.aam-us.org/resources/ethics-standards-and-best-practices/standards and http://www.iac.org.es/seguimiento-del-documento-de-buenas-practicas/documento-de-buenas-practicas-en-museos-y-centros-de-arte).

Spain’s Ministry of Culture was actively involved in drafting these Standards, which were revised and signed in 2007 by the Ministry of Culture, the Contemporary Art Institute, and other prestigious institutions, such as ADACE (Association of Directors of Contemporary Art in Spain), CG (the Consortium of Contemporary Art Galleries), UAAV (the Association of Visual Artists), CCAV (the Board of Critics of Visual Arts), and UAGAE (the Association of Art Galleries of Spain). As in the United States, the Standards are voluntary. The pressure by funders, regulators, the press and the public may be considerable, but museums still choose to follow, or not, the Standards. As of this date, of all 50 museums ranked by the Contemporary Art Institute, only two museums comply with the Standards’ minimum requirements: the Museo Nacional Centro de Arte Reina Sofía and the Artium.

Spain is also trying to overcome the steep cuts in state subsidies and public grants for art institutions by enacting a bill that will heavily increase tax benefits for museum’s private donors (mirroring the French system) through the Patronage Act (Ley de Mecenazgo). If this bill is passed, tax deductions will increase from 25% to 70% for natural persons, and from 35% to 65% for legal persons. Moreover, small donations of less than €150 will be fully deductible. The aim is to achieve France’s success, where revenues increased from €150 million to € 683 million in a seven-year period (2004 to 2011).

In conclusion, the vast majority of museums are nonprofit and ask for public support in return for providing some kind of public good. Thus, it is essential that museums are broadly accountable for their conduct, in particular in times of recession.

Should they sell part of their collection, or should they choose Spain’s path? i.e. advocate for a subset of artworks in the collection to be sent on a 10-year tour (or less) to museums around the world, receiving a revenue stream while having part of its collection available for the public as a representative and emissary of the city of Detroit? Or is there another path?

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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