For many people the defining moment in the Field Museum's recent history was the bid at a 1997 auction that made Chicago home to the Tyrannosaurus rex skeleton known as Sue.



But that choice could have far less impact on the Field's future than another decision made five years later and with much less fanfare: a vote by prominent Chicagoans on the museum's board to issue $90 million worth of bonds for a laundry list of exhibits and building projects.



The move doubled the Field's total bond debt and added millions to its annual expenses. But the board's plan to pay back the money was fraught with risk.



Now, hamstrung by debt payments, the museum is facing far-reaching consequences: layoffs and a massive restructuring that has stirred controversy around the globe.



The Field's gamble was characteristic of a decadelong spending and borrowing spree then under way at many local cultural institutions. A global economic meltdown would eventually undermine their ambitious plans and leave some reeling.



Yet their troubles cannot be blamed entirely on the recession, experts say. The institutions contributed to their problems by starting big-ticket projects without raising enough money, relying instead on overoptimistic financial assumptions. For example, some officials wrongly predicted that expensive renovations would boost attendance permanently.



No major cultural institution in Chicago took on as much risk as the Field, where borrowed money funded acclaimed exhibit halls on evolution and ancient cultures, a state-of-the-art facility to preserve scientific specimens and a new entrance.



When a museum embarks on such projects, the conventional wisdom is that trustees and executives should secure pledges for at least half the cost before breaking ground.



Time and again, however, the Field moved forward without hitting that benchmark. Instead of raising money ahead of time, trustees and staff bet that investment returns would outstrip borrowing costs.



That didn't happen, and fundraising never caught up. In the end, the museum raised just $150 million of the $254 million it spent on capital projects from 2000 through 2011, the Tribune found.



The resulting financial crunch is forcing painful decisions. For more than a century, the Field has maintained a demanding dual mission: running an acclaimed public museum while also conducting world-class scientific research. The cuts are expected to fall heavily on the research side.



"What the administration is talking about in terms of cutting curators and scientists will dramatically and permanently change the nature and mission of the Field Museum," said anthropology curator Jonathan Haas, whose department is being merged with botany, geology and zoology into a single unit. "It will remove us from those ranks of internationally recognized natural history museums."



The cuts also may affect the average visitor. Millions were spent on a hall to display popular traveling exhibits, such as the show featuring clothes worn by first lady Jacqueline Kennedy. Now the museum says it will host fewer such exhibits in part because of the expense to rent them.



The Field's massive borrowing was approved in 2002 by a sprawling board of more than 50 trustees, some of whom acknowledged they gave little thought to consequential votes.



In 2010, after the recession hit, the museum embarked on a plan to shore up its deteriorating finances. Yet the Field implemented few of the recommendations provided by financial consultants brought on to help in the effort, even though the consultants predicted a $12 million annual operating deficit by 2014.



The Field also made a questionable change in accounting practices that caused the museum to appear healthier than it was. It did cut its budget, shrinking its staff by nearly 10 percent. But even that didn't fix the problem.



John McCarter, president of the Field from 1996 until last year, when Richard Lariviere took the post, presided over the spending and borrowing during that period. He said the added exhibits and facilities made the museum stronger and have helped drive revenue. McCarter said everything built under his watch was eventually paid for and that the museum had a lower debt load relative to its peers when it took out the $90 million loan in 2002.



"It was not out on a ledge," McCarter said. "It was very thoughtful bond counsel discussions with the ratings agencies, analysis of the balance sheets of peer institutions."



McCarter also noted that the museum raised more than $70 million before 2000. But those fundraising efforts were expected to contribute just $37 million to capital projects, according to museum bond documents.



Ronald Gidwitz, the former CEO of Helene Curtis Industries who chaired the Field Museum board when the $90 million bond was approved, attributed the Field's problems mainly to bad timing.



"We basically jumped the gun on some of the exhibition construction and development using inexpensive bond money," Gidwitz said. "Had we not run into the recession it would not have been an issue."



The current chairman, former Exelon Chairman and CEO John Rowe, acknowledged the museum took a risk. "I think it's a matter of committing ourselves to things before we fully had the money for them," Rowe said.



Downward spiral



The Field's woes can be traced to the end of the 1990s, when almost anything seemed possible for Chicago's cultural institutions. Endowments looked good. Donors were generous. The Field was on the brink of unveiling Sue the T. rex.



Next door, the Adler Planetarium was building a 60,000-square-foot addition with a state-of-the-art theater. To the north, the Goodman Theatre was preparing to build a new home in the theater district, making room for the Art Institute's Modern Wing to spring up.



"The '90s were the golden days of museums," said Jim Croft, the Field's chief financial officer. "We had a wonderful time in the '90s."



Board members and top museum staff held at least two daylong retreats to draft a long-term strategic plan for the museum, McCarter recalled.



The group wanted to update old exhibits and build new ones, Croft said. It wanted to expand storage facilities for the ever-growing collection and make extensive repairs to the 1921 Daniel Burnham building, which museum leaders called both a blessing and a burden.



When the board members and executives finished their wish list, the price tag was $800 million, Croft said. The museum eventually pared it down to $300 million.



But even that was too high. As the Field prepared to go public with a $300 million fundraising campaign, the largest it had ever undertaken, the rosy outlook for museums began to fade with the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. The list of projects would be trimmed again.



"We started to see turbulence. … We had our seat belts on," Croft said.



The biggest project on the Field's agenda was building a new eastern entrance and a collections center for specimens and artifacts underneath the museum. The museum considered building a cheaper storage space in the suburbs but decided to go ahead with the plan.



The Field lobbied the state for $60 million to fund the project, initially estimated to cost $65 million, but ultimately got just half that.



Despite the setback, McCarter and the board wanted to get started right away, according to a 2001 news release and interviews. The idea was to have the work coincide with the renovation of Soldier Field, which would limit the time the area was under construction and minimize the impact on museum attendance.



The excavation began almost as soon as the state announced its contribution, in September 2001. In all, the Field would raise just $5 million in private money in addition to the $30 million in government aid, according to Croft.



The project ended up costing about $92 million, internal records show.



Barry Lord of Toronto-based Lord Cultural Resources, a consulting firm that advises museums, said he cautions against starting projects without at least two-thirds of the money pledged, because building on credit is risky.



"Museum business plans virtually never produce the kind of margin that can be used to pay off debt," Lord said.



Other experts said at least half the money should be pledged before museums begin a construction project. But Rowe and Croft said such ideals were impractical given that the Field needed to upgrade a 92-year-old building and keep people coming in the door.



"As a student of nonprofit finance, I fully agree you shouldn't engage in a project until you have at least 75, 80 percent of the budget raised," Croft said. "But sometimes you have no choice."



By 2002 the Field hadn't raised much money for its other projects, either, and the board voted to issue the $90 million in bonds. That was three times more than the Field ever had approved before.



Although the bonds, issued in September 2002, were rated as investment grade, there were signs that the Field might not be ready to take on that much debt. Less than a year before, museum staff assessed the Field's bond capacity at only $50 million, according to a letter submitted to the state.



The loan was risky not just in size but in structure. Unlike previous bonds the Field took out, it allowed the museum to make lower interest payments up front and push off bigger ones until later. Meanwhile, no principal was due until the loan matures in 2036.



The bond pushed the museum's total liability to $200 million — more than the $189 million in assets it had available to pay off debt, according to the Field's audited financial statements. The Field's total annual bond debt payment rose from $2.4 million in 2002 to $4.9 million in 2003 It now stands at $7.5 million.



Board Vice Chair William Kunkler, who is executive vice president at the private equity firm CC Industries and has served on the Field Museum board since the 1980s, said he thought the decision to borrow was prudent "at the time."



"It doesn't make sense to Monday morning quarterback a decision like that," he said.



Another board member from those days, longtime television news anchor Bill Kurtis, couldn't remember whether he had attended the vote on the 2002 bond. Kurtis said he "tuned out whenever they came to finances."



"I was far more interested in that new species of flower in Peru," he said.



Betting on attendance



By 2008, the museum was nearly done with $254 million in capital projects and improvements. Meanwhile, its fundraising campaign was over after bringing in just $130 million for capital projects, according to Croft. A separate fundraising effort brought in an additional $20 million, the museum said.



A year later, the Field's bond payments consumed 14 percent of its operating budget. With donor dollars dropping, it was more important than ever for the Field to hit the attendance numbers new exhibits were expected to bring in.



"The whole thing we wanted was to get more people in the door," said board member Marshall Field V, a great-great-grandson of the merchandising king whose name the museum bears.



But the museum's average attendance has remained relatively flat at about 1.3 million annually, despite a $6 million advertising blitz from 2009 to 2011.



"It's something that happened in all kinds of organizations," said Stanley Katz, director of the Center for Arts and Cultural Policy Studies at Princeton University. "You think if you expand capacity, demand will increase to meet it, and it will increase enough so that you can pay off whatever you borrowed. Very frequently that calculation is just wrong."



In its 2002 bond offering, the museum anticipated bringing in 1.5 million to 2 million visitors annually over the next three years. In fact, the Field has hit that benchmark only once in the past decade — in 2006, when the museum hosted the traveling exhibition "Tutankhamun and the Golden Age of the Pharaohs."



The King Tut exhibit was part of a strategy to get people to pay extra to see special temporary exhibits. But those exhibits often failed to move the needle on attendance.



From 2002 through 2008, about 60 percent of the special exhibits at the Field were rented traveling shows. Yet according to the 2010 analysis by the Field's financial consultants, exhibits produced in house drew more visitors on average than rented exhibitions, with the exception of King Tut.



The museum also raised prices to drive up revenue. Visiting the Field now costs $15 for an adult, nearly twice as much as it did a decade ago, and the price jumps to $30 to see all the special exhibits. A ticket to see the 2004 Kennedy exhibit cost more in Chicago than anywhere else it traveled, including Paris and New York's Metropolitan Museum of Art, which created it.



After nine years of deficits, the Field finally started showing an operating surplus in 2009. But the improvement was due mostly to a change in accounting practices rather than a financial turnaround, according to a Tribune analysis of the museum's financial reports. That year, the museum stopped counting depreciation — wear and tear on the museum's building and exhibits — as an annual operating expense.



The new practice is legal and generally acceptable, but the change made it appear that the Field's finances were improving by millions of dollars. In fact, under the old calculations, the shortfalls were as bad as before the change.



McCarter said he did not realize that depreciation was ever counted as an operating expense. "That's a gotcha," he said.



"I think we all would agree in retrospect that that probably wasn't the best accounting system," said Gidwitz, the former board chairman. "It doesn't adequately reflect the condition of the institution."



Yet the museum pointed out the surplus to its lenders in an August 2012 bond document filed a month before McCarter's retirement. The filing did not highlight the new accounting method, asserting instead that positive operating results were accomplished through "the continued implementation" of the fiscal stability plan launched in 2010.



By 2011, the rating agency Standard & Poor's had lowered its outlook on the Field's 2002 bond. Facing the threat of a slip in its credit rating, the museum used money from its endowment to pay down $12 million of its debt — a move that most museums try to avoid because they depend on investment income from endowments to operate.



That same year, McCarter announced he would retire and the museum paid him an $874,375 bonus that more than doubled his overall pay from the previous year, according to tax filings.



Lariviere, who took over the museum in October 2012, said he did not learn the extent of the museum's debt until he got to Chicago.



Painful choices



The size and scope of the cuts now facing the museum will be decided in the coming months. As scientists inside and outside the museum push to minimize the impact on research, board members are set to meet Monday and a final plan is expected this summer.



With the support of the board, Lariviere wants to add $100 million to the museum's endowment, which stood at $274 million at the end of 2011, and raise annual revenue by $5 million.



Among the avenues being explored to increase revenue is a greater push to rent out exhibitions produced by Field staff.



Lariviere also plans to cut the museum's budget, which was about $63 million in 2011, by $5 million. He has said $3 million of the cuts could come from what used to be the museum's century-old science departments, now merged into one.



The Field employs 27 curators, scientists who discover new species and uncover artifacts that illuminate ancient cultures. They help design exhibits but also collect specimens around the world and publish internationally known research. The Field had 37 curators in 2000 but lost 10 and has not replaced them.



The scientists have job protection analogous to academic tenure and cannot be laid off easily. But Lariviere has begun the process that would allow the museum to eliminate curator positions, and scientists around the country now worry that Chicago is squandering a world treasure.



Yale University biology professor Michael Donoghue said he is sympathetic to the Field's need to balance its budget, having served as a vice president at the school and as director of its Peabody Museum of Natural History.



"Unfortunately," he said, "my sense of what's going on at the Field Museum now is that the wrong choices have been made with respect to cutting the science. … I think it's very shortsighted."



An online petition urging the Field staff and board chair to "reconsider proposed cuts to scientific research" garnered more than 12,000 signatures from all over the world.



"The international reputation of the Field Museum is not because they have Sue on display," said Gonzalo Giribet, a Harvard University biology professor. "The international reputation of the Field Museum is because they have first-rate scientists doing great research there, because they have great collections that can be used by researchers all over the world."



Lariviere said the museum will continue to "enhance the collection (and) preserve its scientific importance but also recognize that we can't do everything."



The Field, he said, has to "have the kind of discipline that's necessary to have it live within its means."



hgillers@tribune.com jgrotto@tribune.com Twitter @hgillers Twitter, @JasonGrotto



Coming next week: Many Chicago cultural institutions borrowed big to build, then paid a high price.