Things have gone a bit south for our nation’s financial markets in the past weeks. For our local performing arts center, it was a bit of a last straw. The Overture Center for the Arts announced this week that the trust fund behind its complex financing strategy would be liquidated to pay off a large portion of the debt it was intended to secure. The collapse of the strategy means one rather large leg of the Center’s financial support structure must be rebuilt or reconceived. And it also means the primary donor of the $205 million is in it for at least another $5 million.
In a nutshell, when Jerry Frautschi committed $205 million to the construction of the Overture Center, the operating model and financial projections showed a hole of about $1.5 million in annual operating support. Since nobody at the table was able or willing to fill that hole (the city had capped its investment at historical levels, the expected increases in earned income would help but not entirely, the resident companies couldn’t absorb the cost in rent), bond financing emerged as an innovative alternative. Half of the $205 million would be placed in a trust, and serve as collateral against $115 million in low-interest bonds. As long as the trust stayed at around $100 million or better, and earned reasonable returns on the market, the debt service could be paid with some extra left over each year to feed operations. There’s a handy visual timeline of the whole story here.
It all looked great on paper in summer 2001, but when the papers were signed, along came a series of financial hits (September 11, among them) and a bumpy ride in the financial markets. The trust sank in value, and couldn’t find it’s way back. The most recent decline in the markets brought it down below $90 million, and the underwriters suggested that everyone get out of the pool.
What does it mean for Overture and its community? In the short term, just some belt-tightening, as the current season is underway, and backstops are already in place to cover debt for the next few years. In the longer term, it means a reconceived financial and operating model in a down market, and with increased scrutiny from city officials and wary taxpayers.
Overture isn’t the first organization to face this challenge, nor will it be the last. But as a local organization to me and to my students, it will be one we’re watching closely.
Interesting. I smell a case study for Financial Management — but I also smell a trend, which is a decade of overbuilding. Without criticizing the generosity of the Frautschis, one has to wonder why the Overture Center had to be so much larger and more dramatic than the Madison arts community can support, at least in the short term.
It’s a beautiful set of facilities, and not unusual in the sense that grand buildings seem to have become the norm in recent years, but the business model, like so many others, seems to have been based on the idea that the markets wouldn’t go down.
There are dozens of other examples out there of buildings that the performing arts market can’t support. If this were Europe, or Canada, the answer would come from government, at a miniscule fraction of what the same govts pay for golf. Meanwhile, Good luck, Madison!