Debt, endowment drawdown threaten Colonial Williamsburg's long-term financial health

rbrauchle@vagazette.com

Editor’s note: This article is the second in a series exploring Colonial Williamsburg finances. Up next: Where Colonial Williamsburg gets its money.

In eight years, Colonial Williamsburg will either be planning a celebration or preparing for its funeral.

President and CEO Mitchell Reiss is taking steps he believes will keep Colonial Williamsburg alive and well past the 100-year anniversary of the organization’s founding in 2028. But signs point to a tough road ahead, and he has publicly admitted so.

Reiss warned in a late June letter to the public that Colonial Williamsburg is spending too much and dipping too far into its prized endowment. Within the letter was a call to action that Colonial Williamsburg will need to make “fundamental changes” to the way it operates, lest it dry up its savings within eight years or sooner.

Regardless of who has been at its helm, Colonial Williamsburg has used portions of its endowment each year for more than 30 years to offset its operating expenses.

In good years, parts of the endowment are invested and the organization uses only the interest from those earnings. In bad years, Colonial Williamsburg must draw from the principal of the endowment fund to cover expenses, cutting into its long-term earnings.

Between 2006 and 2016, the endowment has been on a roller coaster, growing to a peak of $819 million at the end of 2007 before plummeting during the 2008 recession to a low of $610.6 million. It crawled back upward to $783.7 million in 2013 and has since undergone a four-year slide to $663.6 million at the end of 2016, according to Colonial Williamsburg’s publicly available tax records and audits obtained by the Gazette. The past four years have been especially problematic, because the amount withdrawn outpaced the interest and earnings.

Without the endowment, the organization would all but crumple.

“I learned a long time ago, I'd rather under-promise and over-deliver, so I have a very aggressive and ambitious timetable for restoring the foundation to financial health,” said Reiss during an Oct. 10 interview with the Gazette. “I think that we are well on the pathway to doing that.”

The Gazette has combed through publicly available tax records and audits dating back to the early 2000s and reviewed Colonial Williamsburg’s annual reports from as far back as the 1970s to get a clearer picture of how the organization operates and where its financial troubles stem from. During its reporting, the Gazette has spoken to more than a dozen people inside the organization and outside experts.

While declining attendance has plagued Colonial Williamsburg for the past 30 years, the Gazette’s review also found that, during the past decade, the organization has been unable to reduce its more than $300 million debt and its endowment has shrunk 14 percent, even as it continues to provide first-class perks to high-level employees.

Colonial Williamsburg is a sprawling organization that combines its nonprofit mission with for-profit hospitality and real estate operations. As a whole, the organization’s $227 million budget in 2016 made it one of the largest nonprofit museums in the country; it holds more than $1 billion in assets and employed 3,400 full- and part-time employees in 2016, according to tax records and a Colonial Williamsburg-generated fact sheet.

For nearly the past two decades, though, a crack has grown in Colonial Williamsburg’s basic business model: Paid attendance and operating revenues consistently shrank and could not keep up with expenses. The organization has increasingly used its endowment as a patch, and in 2016, expenses would have outpaced revenues by $69 million without help from the endowed funds, according to the organization’s 2016 audit.

Still, the American Alliance of Museums reaccredited the Colonial Williamsburg Foundation in early July. In its comments, the alliance acknowledged the foundation’s “financial health is fragile.”

“CW is not yet able to meet its financial obligations without drawing down on its endowment in a way that is not sustainable. There is good reason to believe that, as outlined in the current strategic plan, it will achieve a more fiscally sound operating status by 2021, or sooner,” the alliance wrote.

Colonial Williamsburg declined to make its most recent strategic plan available.

“We have to stabilize the foundation; We're on the pathway to do that,” Reiss said of the organization’s plan moving forward. “We have to make sure we have the balance to do that. We have to make sure the commercial side pays for itself. (Once) we stabilize the foundation's endowment … we can do everything we want to do with history and education.”

Endowment

Stabilizing the foundation’s endowment means taking fewer dollars to support operations in the upcoming years.

Endowed funds are donated dollars the board of trustees designates to the endowment and from donors who give to Colonial Williamsburg with specific restrictions on how their money is used.

“Having an endowment is the height of a life cycle for nonprofits,” said Glen O'Gilvie, CEO of the Center for Nonprofit Advancement. “They can use it to stay around forever if it’s used right.”

During the 2016 fiscal year, Colonial Williamsburg’s endowment dropped from $713 million to $663.6 million, according to an independent auditor's reports of Colonial Williamsburg's books, which were obtained by the Gazette. The decrease includes taking a total of $70.9 million from the endowment to offset operating expenses. (The organization ended the year with a $1.79 million operating surplus, it just needed $70.9 million from the endowment to achieve it.)

It used 12.1 percent of its endowment for operations in 2014 and 11.2 percent in 2015, both of which are well above industry standards.

To ensure endowed institutions do not spend too much of that money, many typically create policies allowing them to withdraw 4-5.5 percent of the endowment’s three-year (12 quarters) average balance. Using the average balance helps smooth the impacts associated with changes in the financial markets. The practice has been widely used since the 1960s, and some institutions even stretch out the balance they consider to 20 quarters. As a written policy, Colonial Williamsburg draws 6 percent of its endowment annually to support operations.

“That nest egg of dollars is invested, and you only want to spend the interest — you never want to spend the nest egg,” said O’Gilvie, whose organization is an advocate for nonprofits and provides training.

The amount of unrestricted dollars in Colonial Williamsburg’s endowment has dropped 26.7 percent from $408.5 million in 2012 to $299.6 million at the end of 2016, according to the organization’s audits. The remaining endowment funds have some restrictions, meaning they can only be spent for specific purposes.

“Standard is a 5 percent draw — that's what success looks like — that's what we're aiming for, and that should be able to allow us to use all of that money to support the core educational and historical programs that we have,” Reiss said.

Debt

Colonial Williamsburg ended 2016 with $317.6 million in debt, nearly three times its annual operating revenue, according to its audit.

“I think we all agree it's a little excessive right now, so we'd like to get it where we can manage it a little more easily and not have lump-sum payments come in any one year,” Reiss said.

The debt the organization carries multiplied through the early 2000s as Colonial Williamsburg prepared for the celebrations surrounding the 400-year anniversary of Jamestown’s founding. Colonial Williamsburg’s debt has not dipped below $300 million since 2004, and the organization pays close to $16 million each year in interest on that debt, according to the organization’s audits.

In its 2006 annual report, Colonial Williamsburg noted it was increasing its debt load for “… Williamsburg Lodge and Spa construction projects and other capital and operating needs.” Borrowing also helped pay for construction of a vehicle maintenance, bus parking facility and visitor’s center, among other projects.

Colonial Williamsburg’s 2016 audit shows the organization has a $137.5 million note due in 2019, a $91.7 million note due in 2021 and a $45.8 million note due in 2024.

Reiss said the Colonial Williamsburg Board of Trustees has created a subcommittee specifically to look at the organization’s debt. Its chairman is trustee Sheldon Stone, who cofounded Oaktree Capital, a global asset management firm.

“We're looking at a variety of options, ranging from paying it off to refinancing, to some combination of the two, and a lot of that depends on interest rates and where we are financially,” Reiss said. “But this is a problem we're going to be managing in the future, and I'm confident this is not going to stop us from achieving financial stability and being able to tell our story.”

High-end benefits

Even with looming debt and an over-reliance on its endowment, Colonial Williamsburg has not stopped paying for a raft of luxuries for some of its employees, including first-class travel, travel for companions, housing allowances, “health or social club dues or initiation fees,” and personal services that could include maids, chauffeurs and chefs. Several employees are provided golf and fitness club memberships “to better facilitate the performance of their duties,” according to the foundation’s 2015 tax filings.

The organization paid $6.1 million in salaries and benefits to 44 officers, directors, key employees and highest compensated employees in 2015, a 13 percent increase from the $5.4 million paid to 40 of those designees the previous year, according to tax filings.

In 2015, Colonial Williamsburg paid 21 people more than $100,000 in base compensation, an increase from the 18 who eclipsed that benchmark in 2014.

Colonial Williamsburg has not yet filed its 2016 IRS forms, which it typically does in the fall or early winter after its fiscal year.

During an Oct. 10 all-employees meeting, Reiss announced he will hire two new senior vice presidents to oversee operations — one overseeing the nonprofit side, the other for the for-profit operations — by the end of the calendar year.

“To make sure that we are not a top-heavy organization, we are reorganizing the senior leadership team and eliminating several vice president positions,” Reiss told employees on Oct. 10. “We must have the right people in place. Not more senior staff; the right senior staff.”

In 2015, Colonial Williamsburg reported paying two presidents, 15 vice presidents, four directors and one controller, according to its tax records. The organization has 10 vice president positions, and some of those positions were filled by multiple people that year because of turnover.

Colin Campbell retired as CEO/president of Colonial Williamsburg in October 2014. That fiscal year, the organization paid him a compensation package worth nearly $763,000. In 2015 — a full year after his retirement — he drew $727,000 in pay and benefits, according to the organization’s tax documents. He remains a nonpaid chairman emeritus on the board of trustees.

An executive secretary at the foundation wrote on Sept. 26 that Campbell is busy and he will “reach out as time permits.” A phone number for the Colonial Williamsburg home provided to Campbell while he was CEO is no longer connected.

Reiss, who came onboard at Colonial Williamsburg in October 2014, was paid $682,922 in salary and benefits in 2015, his first full year of work. The organization hired an independent consulting firm to help determine the pay of the CEO and officers in similar positions at comparable organizations, according to Colonial Williamsburg’s tax records.

In 2015, the foundation required Reiss and Senior Vice President of Development Michael Rierson to live in the Historic Area. In doing so, it provided free housing to them as a nontaxable benefit, the organization reported to the IRS.

Colonial Williamsburg’s organization-wide salaries, compensation and benefits increased 12 percent, from $60.4 million in 2014, to $67.7 million in 2015, according to IRS records. In 2014, the organization issued 1,933 W-2 forms to employees, and 2,031 forms in 2015.

The board of trustees

Colonial Williamsburg is governed by a board of trustees whose members are not paid, but who received several accommodations in 2015, according to the organization’s tax forms.

Colonial Williamsburg reported paying travel costs associated with bringing board members and their spouses to meetings in Williamsburg in 2015. The board’s 28 members include some of the most well-to-do and powerful private and public officials in the country. The group generally meets in the spring and fall, although no public record of their meetings or actions is kept.

Just six of the 28 trustees list Williamsburg as home; others travel from as far away as California, Illinois and Texas.

Board members include MeadWestvaco CEO John A. Luke Jr., who Forbes lists as making $6.14 million this year; Carly Fiorina, who self-reported a net worth of $59 million during her 2015 run for the Republican nomination for president; and Supreme Court Justice Anthony Kennedy.

Kennedy reported in disclosure forms receiving reimbursements for food and lodging for himself and his spouse from Colonial Williamsburg for two trips in 2015 to attend board meetings, although dollar amounts are not provided for those services, according to financial disclosure forms all U.S. Supreme Court justices must file.

The Gazette reached out to several trustees who make their contact information publicly available. Many of them did not respond or declined interview requests through a Colonial Williamsburg spokesman.

In a brief written statement, trustee Joseph Christopher Simmons offered support for the organization and the changes announced in June.

“The actions are needed to enhance the long-term health and viability of Colonial Williamsburg, and we discussed extensively the plans to ensure negative impacts on employees were minimized to the extent possible,” he wrote to the Gazette.

Antonia Hernandez, president and CEO of the California Community Foundation, declined to comment through a Colonial Williamsburg spokesman.

Board President Henry “Hank” C. Wolf also declined an interview request.

Reiss praised the trustees, saying that they are “a great blessing.”

He specifically noted the involvement of Wolf and Senate Majority Leader Tommy Norment, R-James City County.

“Hank is very much invested in the future health and vitality of this foundation, so I'm very lucky to have the board I have,” Reiss said. “Tommy is a great resource, not just for politics, but for explaining the local topography to me.”

Requests through a spokesman to speak with Norment were unfruitful.

Looking ahead

Articles in the coming weeks about Colonial Williamsburg will explore several topics:

The Board of Trustees

Henry C. Wolf, chairman

Joined: 2007

Home: Williamsburg

Retired chief financial officer of Norfolk Southern

Steven L. Miller, vice chairman

Joined: January 2010

Home: Houston, Texas.

Retired as chief executive officer of Shell Oil Co. in 2002.

Mitchell B. Reiss

Joined: October 2014

Home: Williamsburg.

President and CEO, Colonial Williamsburg Foundation

Catharine O'Neill Broderick

Joined: December 2015

Home: Grosse Pointe Farms, Mich.

Former Trustee of the Rockefeller Brothers Fund

Mark A. Coblitz

Joined: December 2015

Home: Wayne, Penn.

Retired vice president of Comcast Corp.

Thomas F. Farrell II

Joined: 2007

Home: Richmond

President and CEO of Dominion Resources

Carly Fiorina,

Joined: May 2017

Home: Washington, D.C.

Former chairwoman of CEO Hewlett-Packard, 2015 candidate seeking the Republican nomination for U.S. President

Annette Gordon-Reed

Joined: March 2016

Home: Cambridge, Mass.

Professor at Harvard Law School

Conrad M. Hall

Joined: April 2017

Home: Norfolk

Retired president, CEO of Dominion Enterprises

Antonia Hernandez

Joined: December 2015

Home: Los Angeles, Calif.

President and CEO of California Community Foundation

Jo Ann Jenkins

Joined: December 2015

Home: Washington, D.C.

Chief Executive Officer of AARP

Anthony M. Kennedy

Joined: May 2001

Home: Washington, D.C.

Associate Justice of the U.S. Supreme Court

Mark J. Kington

Joined: March 2011

Home: Alexandria, Va.

Managing Member of Kington Management LLC

John A. Luke Jr.

Joined: June 2013

Home: Richmond

Chairman of WestRock Co.

Judith A. McHale

Joined: Served 2006-2009, then 2012 to present

Home: Irvington, N.Y.

President and CEO of Cane Investments.

Leslie A. Miller

Joined: 2012

Home: Philadelphia, Penn.

Principal at Leslie A. Miller, Esq. LLC

Cynthia H. Milligan

Joined: 2007

Home: Lincoln, Neb.

Dean Emeritus University of Nebraska, President Wood Stieper Capital Group

Joseph W. Montgomery

Joined: May 2017

Home: Williamsburg

Managing Director-Investments, Wells Fargo Advisors

Thurston R. Moore

Joined: 2009

Home: Richmond

Partner at Hunton & Williams

Thomas K. Norment Jr.

Joined: 2008

Home: Williamsburg

Virginia State Senator, counsel at Kaufman & Canoles

Gerald L. Shaheen

Joined: May 2017

Home: Peoria, Ill.

Retired president of Caterpillar Inc.

Joseph Christopher Simmons

Joined: 2015

Home: Memphis, Tenn.

Retired managing partner at PricewaterhouseCoopers

Sheldon M. Stone

Joined: 2014

Home: Los Angeles, Calif.

Principal and portfolio manager at Oaktree Capital Management

Y. Ping Sun

Joined: 2015

Home: Houston, Texas.

University representative at Rice University

Chairmen emeriti

George B. Beitzel

Home: Redding, Conn.

Former IBM senior vice president

Colin G. Campbell

Home: Williamsburg

Former president of the Rockefeller Brothers Fund; former Colonial Williamsburg president, CEO 2001-2014

Charles R. Longsworth

Home: Royalston, Mass.

Former president of Colonial Williamsburg, 1977-1992.

Richard G. Tilghman

Home: Richmond

Former chairman of Colonial Williamsburg board of trustees, 2008-11

Brauchle can be reached by phone at 757-846-4361.

This article was updated to better represent the number of vice president positions at Colonial Williamsburg.
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