Mortgage crisis hits cultural institutions
Some of Southern California’s major cultural institutions are bleeding because of the sub-prime mortgage crisis, with combined losses of more than $3 million -- and mounting -- since February, when their seemingly safe and innocuous construction bonds turned into fiscal leeches.
Among those scrambling to escape interest payments that have more than doubled are the Los Angeles County Museum of Art, the Orange County Performing Artscenter, the Natural History Museum of Los Angeles County and the Colburn School.
The soaring rates -- which are hitting an array of nonprofits as well as municipalities and government agencies -- reflect doubts about insurance companies that issued policies guaranteeing so-called auction-rate bonds.
Damaged by huge obligations in the sub-prime mortgage market, insurers such as Financial Guaranty Insurance Co., which backed the LACMA, OCPAC and Natural History Museum issues, have been downgraded by financial rating services such as Standard & Poor’s. With the bond insurance no longer ironclad, investors are demanding higher interest -- if they are willing to bid at all.
“It’s a completely irrational market right now,” said Ann Rowland, LACMA’s chief financial officer.
The J. Paul Getty Trust reported oozing more than $650,000 on auction rate bonds since January before it put a tourniquet in place Wednesday. Using its clout as the nation’s richest arts foundation, with a triple-A credit rating, the Getty reconfigured $270 million in suddenly dicey bonds it had issued last year, mainly to finance art purchases.
The four other Southern California institutions don’t have that luxury. All have recent or current construction projects, paid for with bond issues ranging from the Natural History Museum’s $84.4 million to LACMA’s $376.2 million. The tax-free bonds have their interest rates reset weekly. The rates cruised in the 3% to 4% range through 2007 -- and even lower in previous years -- but have jumped as high as 11% for LACMA, 10% for the Natural History Museum and almost 7.5% for the Costa Mesa performing arts center and the downtown music school.
The Getty’s bonds spiked as high as 9.9%, Chief Financial Officer Patricia Woodworth said, before being converted to another form of debt that will have a fixed rate of 1.7% for the next year.
LACMA is the biggest local cultural borrower affected as it plows ahead with new construction and renovations. Its losses are approaching $2 million since Feb. 1, according to Rowland. Interest rates have averaged 8% on LACMA’s debt; it is shelling out about $2.4 million a month to pay its bondholders, double what it had expected. The Natural History Museum, which issued bonds for renovations, has sustained losses of more than $500,000, according to Vice President James Gilson.
OCPAC, which borrowed $265 million to build the Renee and Henry Segerstrom Concert Hall, has seen its interest payments sap $450,000 to $500,000 more than expected from its coffers over the last five to six weeks, according to President Terrence Dwyer.
“What has happened was anticipated by no one,” Dwyer said. Now, he added, OCPAC leaders are “moving as quickly as possible” to restructure the bonds or find bankers to vouch for them in lieu of the now-suspect bond insurers.
LACMA and the Natural History Museum already have a potential white knight: Los Angeles County, which is willing to buy all their bonds as an investment. Mark Saladino, the county’s treasurer and tax collector, said that would cut the museums’ interest payments to about 4.5% while also paying off nicely for the county and other public entities that take part in its investment pool. The deal calls for the museums to pay 1.5% more than the daily average yield of other securities the county buys.
The two museums are run by independent nonprofit boards rather than the county government, but the county pays a big chunk of their budgets. They are “part of the county family” and deserve help to get out of a fix that has left them “hemorrhaging money,” Saladino said. If the proposed deal had been in effect in February, the treasurer said, LACMA would have saved $700,000 during the month.
However, before the county can begin buying the bonds, Citigroup -- which brokers the weekly auctions for both museums -- has to decide whether the proposal will pass muster with the Securities and Exchange Commission. Citigroup is proceeding cautiously, Saladino said, because of sanctions, including $15 million in penalties, that the SEC has levied over the last two years against brokers who violated advance disclosure requirements for certain kinds of bids to purchase auction rate bonds.
Saladino said he hopes the county can begin buying the museums’ bonds “hopefully within days. It could be weeks.” And time is money -- more than $20,000 a day for LACMA alone if recent rates continue.
LACMA, the Natural History Museum and OCPAC all said the damage doesn’t call for any immediate program cuts or other economy measures. “If we need to down the road, we would, but I don’t see that happening,” Rowland said. “We have reserves, we’re looking long-term, and we don’t need to panic right now.”
Rowland and Gilson, the Natural History Museum vice president, said they are trying to line up banks to vouch for the museum bonds by supplying letters of credit. With those in place, they said, interest rates on their debt should drop back to 3% to 4%.
While market turmoil roils the balance sheets of some of their fellow cultural institutions, the Music Center and the California Science Center are proceeding with construction projects financed with unaffected fixed-rate bonds.
The science center decided against the auction-rate option two years ago when it borrowed $82 million to build a new wing that will nearly double its Exposition Park facility, choosing safer and surer bonds with fixed payments of 4.7%. The Music Center is paying fixed rates of 4% to 5% on $27.5 million borrowed to renovate the Mark Taper Forum.
“You always agonize” over what kind of financing to choose, said Jeffrey Rudolph, the science center’s president. “We feel very fortunate. In this case, our risk-aversion ended up being a good thing.”