the Institution's financial status and its planned response to 

 changing conditions; financial results for fiscal year 1994; and 

 measures, both organizational and financial, being taken to en- 

 sure the future fiscal health of the Institution. 



Financial Situation and Prospects 



The Smithsonian approaches its 150th anniversary in 1996 in 

 an austere financial climate. Income from the business activities, 

 which have been confronted with decreased sales and rising pro- 

 duction costs, is declining. Federal increases, while generous, 

 have been directed primarily to specific programs or projects, 

 such as the National Museum of the American Indian, and have 

 not been available for other general operating expenses. The 

 amount of federal funds for general operations has been further 

 diminished by executive orders requiring reductions in the fed- 

 eral workforce and administrative costs. To conform with Presi- 

 dent Clinton's executive order requiring the entire federal gov- 

 ernment to reduce its workforce by the end of fiscal year 1995, 

 the Institution offered its staff, both federal and trust, a volun- 

 tary separation incentive plan. By the middle of fiscal year 1995, 

 federal positions will have been reduced by 206, and trust fund 

 positions by 23. These 23 positions are in addition to 40 trust 

 positions previously eliminated as a part of the fiscal year 1993 

 restructuring process. Federal savings, which will accrue in 

 future years, will be withdrawn from the Institution's budget. 



Despite the rather significant changes in the external environ- 

 ment that have impacted upon the financial condition of all pri- 

 vate, public, and nonprofit organizations over the last several 

 years, the Smithsonian's balance sheet remains stable and strong. 

 The strength of the balance sheet and the high level of liquidity 

 are solid evidence that recent actions to restructure financially 

 have been effective. 



Efforts begun in fiscal year 1993 to contain costs and identify 

 new revenue-producing opportunities and fund-raising strategies 

 are continuing. All Institutional business activities are exploring 

 ways to improve productivity of staff, space, and inventory. 

 Two major reorganizations to reduce redundancies in operations 

 were accomplished this year. These include the combining of 

 two retail operations — the Museum Shops and the Mail Order 

 Division — and of two membership operations — the National 

 Associates and the Resident Associates. Other strategic changes 

 in the business activities include new restaurant concepts, fea- 

 turing the installation of up-to-date formats within existing 

 space; a focus on specialty museum shops; and a test of off-Mall 

 retailing. 



One of the goals of the Institution's restructuring plan is to 

 seek expanded levels of support from individual donors. With 

 information gathered over the past year from a series of focus 

 groups, a study of the economic impact of the Smithsonian on 

 the metropolitan Washington area, and a national telephone 

 survey of prospective contributors, the Institution has more in- 

 formation related to its private sector fund-raising potential than 

 at any time in its history'- This information will provide a sound 



basis for choosing the course of the future of fund-raising at the 

 Institution. 



In addition to its effort to restore financial equilibrium in the 

 funding for its operating programs, the Institution must respond 

 to another need of compelling urgency — the deterioration and 

 obsolescence of its facilities, conditions which, if unaddressed, 

 place the collections and ongoing activities and public accessi- 

 bility at risk. Smithsonian facilities total more than 5.5 million 

 square feet of space and range in age from new to more than 

 140 years old. Funding for maintenance, repair and renovation 

 has not kept pace with the deterioration of the buildings, result- 

 ing in an unacceptable accumulation of deficiencies. The situa- 

 tion has been exacerbated by new legislative requirements for 

 life safety standards (such as removal of lead paint and chlo- 

 roflorocarbons), heightened public awareness of environmental 

 hazards, and the inflationary effect of delaying needed work. 

 The Institution seeks to achieve a balance between correcting the 

 unacceptable condition of its older buildings and maintaining 

 the current condition of its newer facilities through systematic 

 renewal and repair. An annual investment of $40 million would 

 enable the Institution to arrest the rate of decline in the four old- 

 est buildings with the greatest need — the Natural History, Arts 

 and Industries, Smithsonian Castle and American Art and Por- 

 trait Gallery buildings. At least $50 million annually is required 

 both to meet the full need for systematic facilities renewal and 

 to offset normal wear and tear in the newer buildings. 



While the future is always uncertain, the Smithsonian is 

 determined it will not be without choices. With the arrival of 

 I. Michael Heyman as the new Secretary and the work of the 

 Commission on the Future to help shape a vision of the Smith- 

 sonian in the 21st century, the Institution is well positioned to 

 advance its mission in the years to come. 



Fiscal Year 1994 Results 



Revenues received by the Institution in fiscal year 1994 from 

 all sources totalled $678.5 million. Federal appropriations ac- 

 counted for $343.8 million, and nonappropriated trust funds 

 provided an additional $334.7 million. When adjusted to elimi- 

 nate auxiliary activity expenses of $183.1 million, net revenues 

 for operations, construction and endowment principal totalled 

 $495.4 million, reflecting virtually no change from fiscal year 

 1993. The table on p. 85 reflects revenues by source and broad 

 purpose of use. 



Operations (Tables 1 and 2) 



Federal appropriations of $304 million provided the core fund- 

 ing for ongoing programs of the Institution. An increase of $7.1 

 million above fiscal year 1993 appropriations provided addi- 

 tional support for operational requirements of the George 

 Gustav Heye Center of the National Museum of the American 

 Indian; inflationary increases in rent, utilities, salary and benefits 



3M 



