Arts institutions feeling impact of ailing economy

NEW YORK (AP) - April 21, 2008 But rising interest rates brought on by turmoil in the financial markets boosted payments, and the organization got socked for an additional $650,000 in fees earlier this year that it hadn't budgeted for.

Like homeowners and stockholders, arts organizations are feeling the pinch from the faltering economy.

Museums and symphony halls that financed renovations with seemingly safe municipal bonds saw interest rates spike in recent weeks; other arts institutions are suffering from low returns on investments; and some arts executives are worried that recession fears could take a bite out of donations and ticket sales.

"What turns my stomach every time I turn on the news is the current perception of what's happening in our economy and whether people will get nervous and cut back on their charitable contributions," said Charles Thurow, executive director of the Hyde Park Art Center in Chicago, which used a $5 million fundraising campaign to renovate an old Army warehouse in 2006, creating its first permanent home since the center's start in 1939. "That would affect our annual operating budget."

In New York and Los Angeles, well-established institutions including Carnegie Hall, the Museum of Modern Art and the Getty Center are scrambling to refinance their debt after interest rates climbed on so-called auction-rate bonds. The interest on auction-rate bonds is reset as often as weekly at auctions where investors set the rate through bidding.

The allure for issuers, including museums, hospitals and municipalities, has been lower interest rates than is typical of long-term bonds.

Beginning in February, many of the auctions failed to draw bidders because the volatile economy was giving investors cold feet.

"Nobody was willing to buy the bonds," said Donald Elliott, counsel to New York City's Trust for Cultural Resources, which advises arts groups on bond issues. "You had in some cases a failed auction."

When the auctions fail, the interest rate resets to a pre-established default rate which in some instances can be as high as 12 percent or 15 percent.

Patricia Woodworth, chief financial officer at the J. Paul Getty Trust, which operates two museums in Los Angeles, said the shift in auction bond interest rates - from 3 percent to 9.9 percent - cost the organization some $650,000 between January and mid-March.

Luckily, the Getty was able to reconfigure its debt into a one-year bond that brought its interest down to 1.7 percent.

Other institutions have had similar problems, including the Los Angeles County Museum of Art, which borrowed $320 million over three years to pay for its new Broad Contemporary Art Museum wing and other construction. But it reached a deal to stem its losses through an arrangement that brings the county in as an investor.

Then there's Carnegie Hall, which issued $41.6 million in auction-rate bonds six years ago for construction of Zankel Hall, one of its three performance venues, and has seen its borrowing costs rise. Spokeswoman Synneve Carlino said officials there are, for now, riding out the storm.

"At this stage, there are currently no plans to refinance the bonds since the increase in our interest rate has been relatively small and, so far, manageable," she said in an e-mail. "However, as the bond market is unsettled at this time, we are watching to see what alternatives develop."

In Madison, Wis., the downturn in the economy is renewing concerns about the long-term viability of the Overture Center for the Arts, which was finished after several phases of construction just two years ago.

A trust fund created to pay back an $87 million construction bond and a $27 million loan and to pay for long-term facility improvements has dipped to about $100 million from about $104 million last summer.

That's because its investments have earned less than 3 percent in the last year instead of the 8.25 percent required to meet its obligations, said Dana Chabot, treasurer of the Madison Cultural Arts District, which runs the center.

Overture Center President Tom Carto said the center could face problems starting in 2013 when expensive maintenance projects will be required.

"We need to plan for that and make sure we have reserves to meet those needs in the next 10 or 20 years," he said.

There are similar anxieties at the Joffrey Ballet, which launched a $35-million capital campaign to cover the $24 million in costs of acquiring 48,000-square-feet of space in a new skyscraper in downtown Chicago, said acting executive director Christopher Clinton Conway.

"We always hope for the best and plan for the worst. We haven't needed to cut back in any way as we move into the new building, but we're very carefully watching as to increased expenses," Conway said. "We're being extra careful and conservative in our budget for next year."

Michael Kaiser, president of the Kennedy Center for the Performing Arts in Washington, said the bond market fluctuations are just one element of the current uncertainty in the economy. He also cited rising energy prices and the effect of a falling stock market on endowments.

Kaiser said that if cultural institutions need to cut costs they should eliminate things like staff training and new computers. He warned against making drastic cuts in programming.

"In periods of recession arts organizations often overreact, cutting the wrong expenses and making it more difficult to recover when the recession ends," he said.

"The focus has to be in creating important art and then marketing that art in an aggressive way. That's what brings money into arts organizations."

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Associated Press Writers Jacob Adelman in Los Angeles, Ryan J. Foley in Madison, Wis. and Tara Burghart in Chicago contributed to this report.