CAPTION: Scrutiny questions plague Palm Springs Art Museum

The Palm Springs Museum of Art has been in serious financial trouble for at least six years, according to internal documents obtained by The Times. Recent developments have opened Pandora’s box.

On January 15, the accounting firm conducting the museum’s 2024 annual review of the museum’s books attached to its report a “material impairment letter,” a standard accounting practice to alert a client to the reasonable possibility that its internal financial statements are significantly out of control.

Less than three months after the audit letter, in early April, the museum director suddenly resigned, and trustee defections began. There has been a series of resignations from at least eight members of the museum’s board of trustees — nearly a third of its membership — since the spring. One resignation came on the advice of the guardian’s attorney. With 19 curators remaining, according to a list on the museum’s website, the total number has fallen below the minimum of 20 curators stipulated in the museum’s regulations.

Palm Springs Museum of Art Board Chairman Craig Hartzman did not respond to multiple requests for comment.

Eddie Bailey’s accountants, citing a “lack of internal control” at the museum, highlighted six areas of concern, including problems with reporting endowment spending, improper recording of the market value of donated and unlicensed art, and incorrect recording of admission revenue.

Former museum director Adam Lerner was reportedly negotiating a three-year contract renewal when he resigned from his position. Without going into details about his unexpected decision to leave, a museum press release stated that he left for personal reasons. Lerner returned to Colorado, where he previously headed the Museum of Contemporary Art in Denver.

After contacting Lerner via text message, he declined an interview request and referred questions to the museum.

Financial problems at PSAM are not new. According to six pages of notes obtained by The Times, compiled by a trustee who led a task force charged with examining the museum’s finances, the ending endowment balance for 2019 was $3 million higher than the beginning balance on the 2020 statement. Audits and tax returns posted on the museum’s website confirm this puzzling discrepancy.

The notes say it is “highly unlikely” the money was stolen. Instead, they question the museum’s internal accounting practices, which can create a misleading appearance of financial health. By the 2021 review, the external accounting firm that had prepared them annually before Eddie Bailey had resigned.

“This is always a red flag,” wrote museum curator Kevin Comer, an art collector who retired after 30 years as a managing director at Deutsche Bank in New York, and a former professor of accounting techniques and credit management at Ohio State University. Comer, who had been a trustee for less than two years, resigned on November 6.

Reached by phone, Comer declined to discuss the accounting firm’s letter or the staff’s remarks.

Since late July, a long, anonymous email from a person who described himself as a “whistleblower with a direct relationship” to the Palm Springs Art Museum has also been circulating. Fourteen detailed complaints, most of them relating to financial matters, are presented with sobriety, as well as a slow burn of understandable anger. Whether or not the anonymous whistleblower has an ax to grind is unknown to me, but the email is clearly not a list of wild accusations hurled by an unreliable fly.

A coherent level of informed specificity certainly indicates authorship by an insider. Some stated grievances may have benign explanations, while others are troubling.

Comer made some jabs in his resignation letter to his fellow trustees, which was also obtained by The Times. The fiduciary expert, a former member of the board’s finance committee, said he would resign on the advice of his lawyer.

Coomer alleged that the board is ignoring its basic fiduciary obligation to protect “the integrity of the museum, despite our best intentions.” The letter urges the hiring of a law firm and forensic accounting firm to review the museum’s finances, partly to expose past inappropriate tactics on behalf of the current board, and partly to address potential liability.

The Board of Directors discussed a previous task force proposal to this effect, but it went unheeded.

Of particular concern is the reclassification of some restricted funds in 2019. The task force’s observations indicate that the $3 million discrepancy between 2019 and 2020 may have arisen as a change in restricted funds to unrestricted status. Assets donated specifically for a particular function can then appear to be available for general operating purposes.

The notes say the museum has consistently operated at a loss, with some operating deficiencies covered by a 2019 reclassification. A deficit is not unusual for an art museum, but a reclassification of some restricted funds appears to have been appropriate. Presumably, funds that were reclassified as unrestricted at the end of one year to make the financial deposit look good may have their restricted status restored at the beginning of the following year.

Restricted funds can include funds raised through the separation and sale of artworks donated to the museum’s collection. The museum’s common ethical standards require that income from separated artworks be segregated and used only for other art purchases, as well as in the direct care of the collection. For accounting purposes, the monetary value of a nonprofit museum’s art collection is not considered a physical asset carried on the books. The reclassification of reserved technical funds could support the emergence of overall financial activity.

During the long pandemic shutdown of 2020, the cash-strapped museum made the controversial decision to separate and then sell Helen Frankenthaler’s prized 1974 painting, which brought $4.7 million at auction. A 2024 audit indicates that total funds tied up from donors for the purchase of works of art and maintenance of the collections amount to $7.8 million.

To pay the bills, the museum also withdrew its endowment. According to the 2024 audit, the most recent financial statement currently available, the endowment is just over $17 million — a very small amount for a museum whose operating budget last year was about $10.5 million.

“Endowment withdrawals over the past decade totaled approximately $8 million, and total contributions to the endowment amounted to approximately $500,000,” notes the report. “Most years the museum has operated at a loss, including the past three years when the board believed we were profitable,” the document said.

Such a disparity between fundraising and spending, between money coming in and money going out, is frankly unsustainable for this museum – or any art museum, especially when inflation is taken into account.

The endowment is the “seed corn” of a non-profit organization, eaten for short-term gain but despite long-term risks. Even more troubling, the notes suggest that while the five-person executive committee may have been aware of some of the more dire details of the situation, the rest of the board appears not to have been fully informed of the museum’s financial situation.
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Comer’s resignation letter astutely notes, “The bottom line is that this is a leadership group that doesn’t know what it doesn’t know, and this is the most dangerous place any organization can be put.”

The Palm Springs Museum of Art seems to be firmly stuck between a rock and a hard place. Now, it’s unclear how the museum can move forward without a full complement of 20 curators empowered to vote on key decisions — including accepting new members to the board.