Serious financial problems have plagued the Palm Springs Art Museum for at least six years, according to internal documents obtained by The Times. Recent events have opened Pandora's box.
On Jan. 15, the accounting firm conducting the museum's annual 2024 audit of the museum's books included a “letter of material weakness” with its report, a standard accounting practice to alert a client to the reasonable possibility that its internal financial statements are materially out of order.
Less than three months after the audit letter, in early April, the museum's director abruptly resigned and trustee defections began. Since the spring, there has been a cascade of at least eight resignations from the museum's board of trustees—almost a third of its members. One resignation occurred on the advice of the trustee's lawyer. With 19 trustees remaining, according to a listing on the museum's website, the total number has fallen below the minimum of 20 required by the museum's bylaws.
Palm Springs Art Museum board chairman Craig Hartzman did not respond to multiple requests for comment.
Eide Bailly's accountants, citing a “lack of internal controls” at the museum, identified six areas of concern, including problems with reporting donation expenses, improperly recording the market value of donated and removed artworks, and improperly recording admission income.
Former museum director Adam Lerner was reportedly negotiating a three-year contract extension when he resigned. Without going into detail about his sudden decision to leave, the museum's press release mentioned that he left for personal reasons. Lerner returned to Colorado, where he previously headed the Denver Museum of Contemporary Art.
After receiving the message, Lerner declined an interview request, referring questions to the museum.
PSAM's financial problems are not new. The ending endowment balance report in 2019 was $3 million higher than the opening balance in the 2020 report, according to six pages of notes obtained by The Times and compiled by a trustee who led a task force responsible for reviewing the museums' finances. Audits and tax returns posted on the museum's website confirm the mysterious discrepancy.
The notes said it was “extremely unlikely” the funds were stolen. Instead, they question internal museum accounting practices that can create a misleading appearance of financial health. By the time of the 2021 audit, the external accounting firm that prepared them annually prior to the Eide Bailly had left.
“This is always a red flag,” wrote museum trustee 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 and fiduciary practices at Ohio State University. After serving as a trustee for less than two years, Comer resigned on November 6.
Reached by phone, Comer declined to discuss the accounting firm's letter or the task force's notes.
Palm Springs Art Museum
(Guillaume Gouraud/Palm Springs Art Museum)
A long, anonymous email from a self-proclaimed “whistleblower directly connected” to the Palm Springs Art Museum has also been circulating since late July. Fourteen detailed complaints, most of them related to financial matters, are presented soberly, plus a slow surge of understandable anger. I don't know whether the unknown informant has any self-interest or not, but it is clear that the email is not a list of wild accusations made by an untrustworthy gadfly.
A consistent level of informed specificity certainly suggests the authorship of a knowledgeable insider. Some of the reported grievances may have benign explanations, while others are cause for concern.
Comer struck several blows in his own resignation letter to fellow trustees, which was also obtained by The Times. The fiduciary expert, a former member of the board's finance committee, said he was resigning on the advice of his lawyer.
The board of directors, Comer argues, is circumventing a fundamental fiduciary obligation to protect “the integrity of the museum, despite our best intentions.” The letter calls for the hiring of both a law firm and a forensic accounting firm to review the museum's finances, partly to untangle apparently inappropriate past practices for the benefit of the current board of directors, and partly to address potential liability.
Previously, the working group's proposal on this matter was discussed by the board of directors, but remained unheeded, he claims.
Of particular concern is the reclassification of certain restricted funds in 2019. The task force's records suggest that the $3 million difference between 2019 and 2020 may have resulted from the change in the funds' status from restricted to unrestricted. Assets specifically donated for a specific function may be available for general operating purposes.
The notes said the museum had consistently operated at a loss and some operational shortfalls were covered by the 2019 reclassification. Shortfalls are not unusual for an art museum, but the wisdom of reclassifying some limited holdings is questionable. Presumably, funds reclassified as unrestricted at the end of the year to make the financial statements look good could regain their restricted status early the following year.
Restricted funds may include money raised through the retirement and sale of works of art donated to the museum's collection. General museum ethical standards require that proceeds from removed works of art be sequestered and used only for the acquisition of other works of art and for the direct care of the collection. For accounting purposes, the monetary value of a nonprofit museum's art collection is not considered a tangible asset to be accounted for. Reclassification of sequestered arts funds could maintain the appearance of overall financial health.
During the long pandemic closure of 2020, the cash-strapped museum made the controversial decision to withdraw from the collection and then sell a prized 1974 Helen Frankenthaler painting that brought $4.7 million at auction. According to the 2024 audit, the total amount of funds allocated by donors for the acquisition of works of art and the maintenance of collections was $7.8 million.
The museum also uses donations to pay bills. The 2024 audit, the most recent financial report currently available, puts the endowment at just over $17 million—extremely low for a museum whose operating budget last year was about $10.5 million.
“Donation fundraising over the last decade has totaled approximately $8 million, and contributions to the fund have totaled approximately $500,000,” the notes said. “The museum has operated at a loss for most years, including the last three years when the board believed we were profitable,” the statement said.
Such a disproportion between fundraising and expenses, between money coming in and money going out, is frankly unacceptable for this – or any other – art museum, especially when you take inflation into account.
The donation represents the nonprofit's “seed of corn” that is eaten for short-term gain only at long-term risk. Most troubling: The notes show that while the five-member executive committee may have been aware of some of the more complex details of the situation, the rest of the board did not appear to be fully briefed on the museum's financial situation.
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“Ultimately,” Comer astutely notes in his resignation letter, “it is a leadership group that doesn’t know what it doesn’t know, and that is the most dangerous place an institution can be.”
The Palm Springs Art Museum is apparently firmly stuck between a rock and a hard place. It is now unclear how the museum can move forward without the full group of 20 trustees, who have the authority to vote on major decisions, including the addition of new members to the board.
