As of Nov. 12, 2024, S&P Global Ratings maintains more than 100 ratings within the broad and highly diversified U.S. not-for-profit sector, 34 of which are maintained on cultural institutions that preserve and promote history, nature, and the visual, performing, and applied arts. Within this subsector, organizations range from fine arts museums and concert halls to aquariums and zoological parks, and vary widely in their target demographics, admission and membership structures, revenue streams, and financial flexibility. Despite their diverse characteristics, institutions in this subsector are unified by a common mission to share experiences with audiences from across the nation and the world.

After elevated health and safety risks hindered their ability to carry out that mission during the height of the pandemic, many cultural institutions have tapped donors and reached into their endowments to fund blockbuster attractions and new digital experiences to fill their halls again. Concurrently, senior leadership teams have contended with inflationary pressures and economic uncertainty that have dampened attendance growth; what's more, labor market challenges have made the cost of operations and rehiring employees more expensive. Investment market volatility remains a risk, although, over the past two fiscal years, most institutions have recouped losses incurred immediately following the fiscal 2021 boom. Finally, most cultural institutions have reported a resurgence in attendance and are bouncing back from the pandemic in stable condition thanks to strong leadership, proactive expense management, and solid financial flexibility.

Rated Cultural Institutions: Overview

As of Nov. 12, 2024, approximately 91% of rated cultural institutions have stable outlooks, 6% have positive outlooks, and 3% have negative outlooks. Since our last cultural medians report, "U.S. Not-For-Profit Cultural Institutions’ Credit Quality Held Steady During The Pandemic," published Nov. 28, 2022, on RatingsDirect, we've raised the ratings on four institutions, with each upgrade driven, at least in part, by the institution's financial resource strength and post-pandemic recovery. In January 2024, we upgraded the Morgan Library & Museum to 'AA-' from 'A+'. We also assigned a 'AA-' rating to Shedd Aquarium Society shortly after publishing our last median report.

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Rebounding Demand And Rising Donor And Endowment Support Are Spurring Revenue Recovery

Visitor numbers have steadily rebounded after they hit record lows at many institutions during the height of the pandemic. Median annual attendance fell to a low of just over 296,000 during fiscal 2021, with performing arts institutions hit particularly hard as many cancelled either all or part of their seasons. As the public health situation improved across the country and institutions fully reopened their doors, visitorship slowly increased due to pent-up demand, but also due to the continued leveraging of digital marketing and social media, which facilitated ongoing engagement with members and frequent visitors during the pandemic. Several institutions also invested in or enhanced existing online and digital programs during the pandemic, some of which have become permanent features. We understand that some institutions sought donor support or made extraordinary draws from their endowments to finance major exhibitions or events to bolster attendance.

Although these strategies, among others, helped drive median annual attendance to approximately 935,000 in fiscal 2023, 25 of 31 institutions reported that fiscal 2023 visitorship was still down from fiscal 2019 levels. The slow rebound can in part be attributed to the tough, albeit moderating, inflationary environment's effect on consumer spending in addition to the sluggish recovery of tourism. Based on conversations with senior leadership teams, we expect attendance numbers will continue to gradually return to pre-pandemic levels, but believe innovation and creativity will be required to keep demand strong over time.

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As attendance at cultural institutions has slowly recovered, admission, membership, auxiliary, and fee revenue has followed suit, with endowments and donors stepping up when needed. Median operating revenue totaled $78.8 million in fiscal 2023, up from $54.3 million in fiscal 2021. Reflecting this slow recovery, around half of all rated institutions report that fiscal 2023 attendance-driven revenue has eclipsed pre-pandemic levels while median attendance-driven revenue was less than 2% lower in fiscal 2023 than it was in fiscal 2019. While some of this rebound can be attributed to ticket and membership price increases that many institutions have levied since reopening, we believe most of it reflects steadily rising attendance due to pent-up demand and recent investments in high-profile exhibitions and programs. To fund these investments, some institutions made one-time supplemental draws from their endowments while others turned to donors and other institutional stakeholders for philanthropic support. Some blockbuster attractions, particularly limited-time exhibitions in museums, also demand premium pricing; if the attraction is well attended, this can further bolster operating revenue.

Gift and contribution revenue has largely remained stable in recent years. Median endowment income, on the other hand, has increased from pre-pandemic levels on an absolute and relative basis; while median endowment income was higher in fiscal 2023 than it was in fiscal years 2019 and 2021, it also constitutes a larger share of overall revenue than it did in previous years. For some institutions, this could be the product of a higher annual draw rate while, for others, it could be the product of declines in other revenue streams. Although we expect steadily recovering attendance will spur revenue growth, we expect some institutions will continue to lean heavily on endowment and gift revenue to support operations.

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Despite a partial attendance recovery, operating expenses have climbed sharply

Cultural institutions' operating expenses have risen sharply as senior leadership teams have worked to balance the reopening of doors with sticky inflation, persistent labor market pressures, and high utility costs, in addition to ongoing investment in new exhibitions and programming to drive attendance. While attendance-driven revenue has yet to fully recover at most institutions, our data shows that nearly three-quarters of rated entities reported higher operating expenses in fiscal 2023 than in fiscal 2019. Across the entire subsector, median operating expense was $79.3 million in fiscal 2023, up 55.6% since 2021 and 8.5% since fiscal 2019. Because the budgets for many performing art venues are composed of a high level of variable costs relative to those of other cultural institutions, those institutions were quickly able to reduce operating expenses at the start of the pandemic. Similarly, as the public health situation improved and demand for in-person performances rose, expenses related to talent, design, marketing, sets, and music have also climbed.

Some institutions that reduced staff and cut benefits to adjust for lower operating revenue during the height of the pandemic have found hiring back those same employees is costlier than before the pandemic. In fiscal 2023, performing art venues recorded median operating expense of $85.1 million, more than 20% above the fiscal 2019 median. Due to inherently higher fixed costs, institutions such as museums, zoological parks, and aquariums were unable to significantly curtail operating expenses at the onset of the pandemic, but have also experienced a more gradual rebound in recent years. In fiscal 2023, these institutions recorded a median operating expense of $70.9 million, up 11.5% since before the pandemic. Since the close of fiscal 2023, inflation in the U.S. has steadily trended downward and many economists, including those at S&P Global Ratings, project that inflation could meet the Federal Reserve's target of 2% in 2025. While this could alleviate some expense pressure, we expect programmatic investment and employee compensation, among other factors, could limit any material expense reduction over the coming years.

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Market volatility has hit financial resources, although most remain above pre-pandemic levels

Throughout fiscal 2021, a booming stock market facilitated robust financial resource growth for all rated cultural institutions, with almost all organizations seeing healthy investment portfolio gains. However, market volatility followed for the next few years. Across all rating categories, median cash and investments totaled $372.7 million in fiscal 2023, up from $307.2 million in fiscal 2019, but down from a $411.7 million high in fiscal 2021. Median expendable resources followed a similar trend, rising from $182.6 million in fiscal 2019 to $302.3 million in fiscal 2021 before falling to $281.7 million in fiscal 2023. Preliminary reports indicate that fiscal 2024 investment returns were generally positive, which yield growth to financial resources across the subsector. While some market watchers predict market volatility could return in the short term, most institutions hold well-diversified investment portfolios and have good cash management practices, and therefore, we do not expect liquidity will be a risk factor.

With some institutions taking advantage of the low interest rate environment during the height of the pandemic to fund capital projects and refinance existing debt, median debt outstanding in fiscal 2023 rose slightly above fiscal 2021 levels largely caused by sizable issuances by only a few institutions. Other institutions, however, continued to amortize debt and pay down lines of credit that had been drawn as precautionary measures shortly after the onset of the pandemic.

With debt outstanding for more than two-thirds of rated cultural institutions falling from fiscal 2021 to fiscal 2023, financial resource levels relative to debt improved. As institutions continue to pay down debt and remain cautious about further issuance, we expect these metrics will gradually strengthen. Over the coming years, we expect balance sheets will largely remain stable.

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U.S. Not-for-Profit Cultural Institutions Subsector View: Stable

Our sector view on the cultural institution subsector of U.S. not-for-profit institutions for 2025 is stable. Although rising expenses, labor market difficulties, market volatility, and slowing consumer spending persist, we believe financial resource strength, careful financial stewardship, and innovative program offerings will continue to help institutions remain financially sound in the near term.

What We're Watching

Digital and social media expansion.   While online and digital programming was initially necessitated by the pandemic, after reopening, many institutions have continued to develop these offerings. In the next few years, we expect that online exhibitions and performances will remain an avenue for institutions to strengthen their brands and reach new audiences, with some already launching livestreaming performances on various platforms and others leveraging online courses and workshops to attract clientele and new sources of revenue. Institutions are also connecting to audiences worldwide with virtual tours and social media campaigns, showcasing behind-the-scenes and user-generated content to expand their reach. Furthermore, AI is revolutionizing cultural institutions by enhancing visitor experiences through interactive exhibits, personalized tours, and better collection management. At one New York City museum, a sophisticated machine learning model interprets works in the museum's collection that are encoded on the blockchain and transforms them into new, unique pieces. We believe that, over the next few years, institutions will continue to explore the capabilities of AI while expanding online and digital programming and further leveraging social media.

High-profile exhibits and expanded fundraising.  In recent years, a growing number of cultural institutions have invested in high-profile exhibits and performances with the goal of drawing greater visitorship. We believe that institutions will continue to leverage loaned and special exhibitions to enrich their collections and provide high-demand and unique experiences that attract new visitors. Often along with new exhibitions, institutions host special events or educational workshops that both generate additional revenue and increase public engagement. Considering the ongoing decline in public funding for many cultural institutions, we believe that organizations will seek greater donor engagement and continue to diversify their fundraising sources to not only involve corporations, foundations, and individuals, but also find innovative ways to cultivate giving. Based on our discussions with senior leadership teams, fundraising was stable in fiscal 2024 and we expect it will remain so in the near team absent a deep recession that hinders donors' willingness or ability to give.

Economic outlook could pressure consumer spending and attendance.  Although attendance has rebounded from pandemic-era lows, we recognize the impact of economic conditions on consumer budgets. Despite an expanding labor force, real income growth has decelerated, and discretionary spending is showing signs of slowing. Specifically, with real income growth slowing, the household savings rate at a two-year low, and credit card delinquency rates exceeding pre-pandemic levels, we anticipate that consumers will likely reduce their discretionary spending, which could dampen tourism and slow cultural institution attendance over the coming years. (See "Economic Outlook U.S. Q4 2024: Growth And Rates Start Shifting To Neutral," published Sept. 24, 2024, for more information.)

Unionization and increased compensation and benefits expenses.   Personnel costs, often constituting more than half of a museum's budget, have posed significant challenges for senior leaders. Many institutions have identified that it has become more difficult, but also more important, to attract and retain qualified employees. In recent years, curators, educators, and other staff at prominent museums across the country have joined or formed unions to drive institutional change. Although many of the institutions we rate have longstanding unions and have successfully renegotiated contracts over the years, we believe that a failure to reach consensus in future negotiations could heighten operational, financial, and reputational risk. Furthermore, we believe unionization efforts and general calls for compensation increases could also put financial pressure on institutions.

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