MUSEUMS Sheffield built up a £1.7 million debt with Sheffield Council by underestimating running costs at the revamped Weston Park building and due to changes in Government funding, its management revealed.
They also said the organisation received insufficient funding for its programme and was being hit by rising utility bills.
But chief executive Nick Dodd and chairman Sandra Newton said costs have now been slashed and the Trust expects to be in the black at the end of 2010/11.
The Trust faces further challenges, including phasing out in 2012 of a Government grant worth £600,000 annually, funding 28 workers who provide its education service.
But this could be compensated for with a bid to become one of nine groups of city museums recognised as being of national importance.
It could bring in up to £2m of extra each year and a bid is to be made in September.
Mr Dodd revealed the Trust found itself £650,000 over budget at Weston Park Museum in March 2008, six months after it was officially-reopened, after “anticipating lower figures”.
The £600,000 Government grant funding education workers was also switched to be paid retrospectively rather than for the year ahead in 2009, meaning a funding-gap for a year.
Mr Dodd said: “We had three choices - cut, raise more money ourselves or ask the council for more money.
“We did all three. We cut costs, shed staff, froze salaries and cut exhibitions, saving £500,000 a year.
“We have also made more money, including from extra sales in our shops, and secured external funding for a Sports Lab at Weston Park and £200,000 for revamping the Ruskin Gallery.
“We wanted to pay our debts, then the recession came and hikes in bills.
Ms Newton added: “Changes affected us such as how Government altered the way it paid a grant to us from being in advance to being at the end of 2010/11.”
She said the rest of the debt came because the trust had not received sufficient funding to “allow us to deliver the service the city wants us to deliver”.
Museums Sheffield, which receives £3m a year, including £2.3m from Sheffield Council, is preparing to make a 15 per cent budget cut as council funding is reduced in 2011/12, making further job losses among its 121 staff “almost certain”.
“We are now in the black but only by a tiny amount,” Mr Dodd added.
A report to Sheffield Council’s audit committee on Monday says two reviews are being carried out into the Trust but Mr Dodd and Ms Newton said the reviews, and two others, have been completed - giving a “clean audit” and recognising the service had been under-funded.