Economic Woes Spread to Arts Institutions

NEW YORK—Museums, concert halls, and other cultural institutions are beginning to feel the effects of a slowing economy, the Associated Press reports via the New York Times.

Arts organizations that financed renovations and other projects with seemingly stable municipal bonds have seen interest rates rise dramatically in recent weeks, and major institutions throughout the country — from the Museum of Modern Art in New York to the Getty Center in Los Angeles — have been scrambling to refinance their debts.

The problem has been particularly severe for institutions that have relied on so-called auction-rate bonds, whose interest rates are reset at regular auctions through an open bidding process. The advantage of these bonds is that they typically have lower interest rates than long-term bonds; however, when the auctions fail to draw bidders, as began to happen in February due to increasingly conservative investor behavior, interest rates are automatically reset to pre-established default rates, which can be as high as 12 to 15 percent.

Patricia Woodworth, chief financial officer at the J. Paul Getty Trust, which operates two museums in Los Angeles, said the organization has seen auction bond interest rates rise from 3 percent to 9.9 percent — costing 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 decreased its interest to 1.7 percent.

The Los Angeles County Museum of Art, which borrowed $320 million over three years to pay for its new Broad Contemporary Art Museum and other projects, faced a similar problem, but it was able to stem its losses through a deal that brings the county in as an investor.

New York's Carnegie Hall, which issued $41.6 million in auction-rate bonds six years ago for the construction of Zankel Hall, one of its three performance venues, has also seen its borrowing costs rise. At this point, the organization has decided to try to ride out the storm.

Another problem troubling institutions is the low returns being generated on investments. For example, the long-term viability of the Madison, Wisconsin–based Overture Center for the Arts, which was finished after several phases of construction just two years ago, has been called into question since its investments have earned less than 3 percent in the last year, instead of the 8.25 percent required to meet its obligations, according to Dana Chabot, treasurer of the Madison Cultural Arts District, which runs the center.

Michael Kaiser, president of the Kennedy Center for the Performing Arts in Washington, D.C., cited rising energy prices and the effect of a falling stock market on endowments as additional problems facing cultural institutions.

And many administrators fear that recession worries will also affect donations and income from admission fees, which are crucial to operating budgets.