On a recent Friday evening at New York's Metropolitan Museum of Art, the topic of conversation was Walter Annenberg's just-announced gift to the museum of his billion-dollar art collection. Snippets of chatter about the bequest punctuated the soothing strains of a string quartet in the Met's lobby and the buzz of diners in the museum's candle-lit restaurant. Yet in spite of the good news on the donation front, what few of the visitors at the Met realized is that the grande dame of American museums has some real financial troubles. It ran a $2.6 million operating deficit in the 1989-90 fiscal year (out of a total budget of $75 million) and is hoping to hold its 1990-91 deficit down to $1 million.

The Metropolitan's financial woes are by no means unique. How bad is it for American museums? At the Detroit Institute of Arts (DIA), every museum director's nightmare has become reality. Newly elected Governor John Engler has proposed a 1991-92 Michigan budget that would eliminate the state's $16 million contribution to the museum, well over half the DIA's $26.5 million budget (see Art & Auction, April 1991). Just last October, the museum's board approved the proposal for a $75 million, Michael Graves-designed renovation and expansion. Now, says Director Samuel Sachs II, "the plan will collapse in a heap without operating monies." Worse yet, Sachs is willing to entertain the possibility of the DIA's actually closing, which would be a shocking first in the annals of major American museums. "How many options are there?" he observes. "To replace that $16 million with private-sector funding will take 10 to 15 years."

Although most states' fiscal year 1992 budgets are still in process, many other museums will suffer mightily if certain governors have their way. New York's Mario Cuomo, pleading a potential 1991-92 state budget deficit of $6.4 billion, has proposed a 56 percent cut for the New York State Council on the Arts (NYSCA). If it is enacted, funding for the NYSCA's Museum Program will drop from $6.36 million in 1990-91 to $3 million the next year. In New York City, such cuts will be coupled with a likely cutback that could reach 25 to 30 percent for municipal institutions - including the Metropolitan and the Brooklyn Museum.

Because the hardest-hit museums are located in the recession-blighted Northeast and Rust Belt, it's tempting to regard current museum travails as regional and recession-related - at least at first. But to place all the blame on a single financial downturn is to ignore the broader causes: a complex confluence of museum policy, public policy and politics. Or as Richard Oldenburg, director of New York's Museum of Modern Art, puts it: "Even if the recession ends soon, it will take several years to restore funding, and everyone will still be facing shortfalls. Museums have grown too fast, relied too heavily on corporations for exhibition programming support and been victimized by recent changes in tax policy. We are - in short - exceedingly vulnerable."

A little history: The end of the 1980s marked the end of the museum boom that was born in the late '60s. In the '70s, publicity-grabbing blockbuster exhibitions were perfected, swelling museum attendance. The '80s brought even bigger audiences, widespread corporate support and an unprecedented building boom. In the mid-'80s, annual corporate giving reached about $130 million, and attendance hit some 635 million visits a year. Yet museums' operating costs were rising steadily. The Association of Art Museum Directors (AAMD) - an organization that represents 160 institutions with budgets of more than $1 million - reports a 46 percent jump in the operating expenses of 111 of its members between 1985 and 1989. And any museum director will tell you that operating support is far harder to obtain than money for new construction. (This unfortunate fact of life explains the seeming paradox of the recent opening of a state-of-the-art auditorium at the Brooklyn Museum on the heels of staff layoffs. As are so many museum projects, it was financed by a private donation long earmarked for that purpose.)

The federal government's tax policy hasn't helped matters much. As just about everyone has heard by now, the 1986 revision of the tax code drastically reduced taxpayers' incentives to contribute art to museums, and the number and value of donated art objects fell off more than 50 percent between the fiscal years 1986 and 1988. The problem attracted the attention of art-savvy New York Senator Daniel Patrick Moynihan. Under his leadership, Congress enacted a "window of opportunity" allowing donors once again to deduct the full market value of artworks donated in fiscal year 1991. Hearings to determine the effectiveness of the measure and the desirability of its renewal are scheduled for this October. But as arts attorney Barbara Hoffman notes, "People unfortunately tend to wait until New Year's Eve to act on tax-related matters. Museums will have trouble showing Congress in October that donations have increased."

The effect of the depressed resale market is also likely to accelerate such giving, and to encourage museums to acquire - rather than deaccession - artworks. Indeed, Sotheby's New York confirms that its sales to museums for 1990 were up somewhat over 1989. But given the straitened financial circumstances at so many institutions, most are focusing on garnering donations under the tax "window" rather than on outright buying.

Yet in recent years, another kind of IRS-induced anxiety has arisen at museums: known as UBIT, or the unrelated business income tax, it concerns the income, now tax-free, that museums derive from selling reproductions of artworks in their collections. The UBIT changes contemplated by the House Ways and Means Oversight Subcommittee over the last four years would cost the Metropolitan Museum, for instance, more than $1 million annually. Yet the initial attempts to modify UBIT were beaten back by concerted lobbying before hearings in late 1989, and changes in UBIT are for the moment "off the front burner," according to Ed Able, executive director of the American Association of Museums.

The determination of tax policy and state arts council appropriations has its political dimensions. "People who are opposed to public support of the arts are using the [depressed] economy as a rationale," asserts Oldenburg. State officials who target arts councils for drastic cuts while leaving other agencies relatively unharmed subvert their own political and economic agendas. And such cutbacks fly in the face of numerous studies. Sachs cites one suggesting that every dollar invested in the arts generates $18 in tourism and ancillary economic activity, and a similar study commissioned by the New England Foundation for the Arts sets the ratio at 15 to 1.

Why cut revenue-generating investment when the economy is weak? Spokespeople for the governors of New York and California attribute their decisions to "tough choices." And the political fracas of the last two years surrounding the National Endowment for the Arts (NEA) has made it clear that, in some circles at least, there is political hay to be made from denigrating artists and art institutions. But some of the responsibility for the NEA-bashers' success also rests with arts professionals who fail to understand a culture in which government support for the arts can never be taken for granted. As Earl A. Powell III, director of the Los Angeles County Museum of Art, observes, "We've failed at conveying the value of art and the number of communities our museums try to serve."

This failure may be a key to understanding museums in the '90s. Although financial issues will continue to bedevil them at least into the mid-'90s, many observers note that other issues are rising to the top of museum agendas. They are beginning to expand their aims beyond upping revenue and attendance into efforts to reshape the identity (and sometimes the practices) of the American museum. Bringing in different segments of the community has become a priority at many major museums. John R. Lane, director of the San Francisco Museum of Modern Art, is typical in his desire to "broaden the cultural and ethnic diversity of the museum's audience." This trend is already under way. At most museums, the education department is a major growth area. The AAMD reports that its members' education budgets rose almost 53 percent between 1985 and 1989, from $30 million to $46 million. As one museum staff member quips, "Education has become such a powerful fund-raising tool, we're calling our new galleries a school."

The reasons are easy to discern. Public concern about education has increased as funding has dropped off, and arts programming is frequently the first casualty of the budget ax. A recent report found that 400 out of 600 public elementary schools in New York City do not have art and music teachers, despite the city's requirement that six months of each be taught to every student. Enter museums. Staggering numbers of students visit them each year: 200,000 at the DIA; 40,000 at the Walker Art Center in Minneapolis. In one farsighted initiative, the Brooklyn Museum also supplies intensive art training for 10,000 teachers.

Corporations and foundations are fueling such activities. Like some museums, many corporations found themselves overidentified with the building binge and glitz of the '80s. Today, notes Susan Bakst, spokesperson for the New York-based Business Committee for the Arts, "Corporations are interested not only in funding shows but also in developing long-term strategies for art education, conservation or reorganizing permanent collections." One example of the new corporate-funded outreach programs is the Metropolitan Life Foundation's recent grants to a number of far-flung institutions to support their interactions with nonprofit art centers that sponsor multicultural exhibitions and projects.

Critics of the museum education trend fear that the current surge of interest will be simply a cyclical fad in a society with a short attention span. The education director of one major museum, who requested anonymity, suggests that the multicultural emphasis of current museum education is no more than a sop to those who call for museums that better reflect American cultural diversity. "To get money now, museums have to attract diverse audiences," he comments. "To do that, it's easier to focus on education than it is to change exhibition programming or to integrate your curatorial staff. And remember that unlike curatorial departments, most education departments are primarily funded by outside grants."

The new social emphasis that many see as the direction for museums in the '90s should be strengthened by the arrival on the scene of an emerging breed of museum directors who were radicalized by the experiences of the '60s and '70s, and who are now leading the charge to expand museum audiences. These include Kathy Halbreich, the Walker Art Center's new director, and David Ross, who recently took the reins of New York's Whitney Museum of American Art, as well as Marcia Tucker, longtime director of New York's New Museum of Contemporary Art.