ARTICLE OF THE WEEK
“A Ransacked Endowment at New York City Opera.” By James B. Stewart. New York Times. October 12. 2013. A fundamental premise of successful investing is “sell high, buy low.” So what explains the New York City Opera board’s decision to do the opposite? In what appears to have been panic selling, the City Opera board sold all the equities in the opera’s endowment and moved to cash in October 2008, as the stock market was plunging to new lows, and stayed in cash during 2009, as the market recovered and surged upward. The opera recorded an eye-popping $9.5 million investment loss for fiscal year 2008, ending in June 2009. There are surely many people responsible for the sad fate of New York City Opera, a much-loved cultural treasure that filed for bankruptcy last week after years of mounting deficits, management turmoil and bad decisions. But the fate of the endowment, established to ensure the existence of City Opera in perpetuity, is a stark measure of the management failure. City Opera had an endowment of $51.6 million in 2001. By June 2013, the market value had dwindled to just $5.2 million through both additional investment losses and the board’s decision to invade the endowment to cover huge operating deficits. Nor did the City Opera board act alone. It had to obtain court approval and the imprimatur of the New York attorney general at the time, Andrew M. Cuomo, whose office was charged with protecting the public’s interest and the interest of donors to charities, before it twice invaded the endowment — for $17.5 million in 2008 and $6.6 million in 2009. The attorney general did not intervene before City Opera’s deteriorating finances reached the point of no return. Endowments exist to generate cash for current operations and, even more important, to ensure an institution’s survival, especially in difficult times. The Lila Acheson and DeWitt Wallace Fund for Lincoln Center, the source of most of the City Opera’s endowment, stated explicitly that the funds must be maintained “in perpetuity as an endowment fund.” Courts usually at least pay lip service to the notion that invading a restricted endowment is a grave step that should be granted only in rare circumstances.