NEW YORK—A growing number of art museums and other nonprofit institutions are issuing tax-exempt bonds as a way to borrow large sums of money at lower cost. In recent years several nonprofit institutions, have applied to the independent ratings company Standard & Poor’s for credit assessments. For investors who buy nonprofit bonds, the interest payments generally are not taxed.
“More cultural institutions view debt issuance as a viable source for raising capital,” says Josh Stern, director of Standard & Poor’s public finance department. At present, he reports, the number of rated museums is 25, or about double the number of ranked institutions ten years ago: “When they are involved in a multimillion-dollar expansion, museums can’t wait until all the money comes in before they begin work.”
The increasing use of bonds also reflects the influence of younger, financially savvy museum board members and trustees. While universities and other nonprofits, including hospitals, have long embraced debt issuance as a way to finance renovations and expansions, museums, particularly the smaller institutions, are relatively new to the practice.
During 2006 the Art Institute of Chicago and the Cleveland Museum of Art—both involved in major expansions—touted their A ratings from Standard & Poor’s in public statements. The Art Institute’s rating is actually A+, the highest available. In 2005 the Cleveland Museum of Art opted for a $90 million, variable-rate demand bond.
Among other art museums rated by Standard & Poor’s: Fine Arts Museums of San Francisco (A-); Nelson-Atkins Museum of Art, Kansas City, Mo. (AA-); Joslyn Art Museum, Omaha, Neb. (A-); Metropolitan Museum of Art (AA+) and Museum of Modern Art (AA-), New York; Walker Art Center, Minneapolis (AA-); and Smithsonian Institution, Washington, D.C. (AAA). Differences among ratings largely reflect the ratio of the individual institution’s debt to its liquidity.
Smaller Museums Climb Aboard
While the issuance of bonds mainly has been the province of the largest institutions, says Jason Hall, government affairs director of the American Association of Museums, “some smaller museums have been looking into this area of raising funds, too.” In 2006 the Holocaust Memorial Foundation, Skokie, Ill., and the Telfair Museum of Art, Savannah, raised $28.5 million and $8 million, respectively, for new facilities through bonds.
Not all institutions have been successful with debt issuance however. Colorado’s Ocean Journey, Denver, an aquarium whose $93 million cost had been funded partly by a $57 million bond in the late 1990s, defaulted in 2003, returning 33 cents on the dollar to investors. Earlier, in the 1980s, the Intrepid Sea, Air & Space Museum, New York, defaulted on bonds, leaving bondholders with just 23 cents on the dollar.
Boston attorney Steven Hoort, head of the bankruptcy and business-restructuring department at Ropes & Gray, told ARTnewsletter the largest class of defaulting nonprofit institutions tends to be in the health-care industry—involving nursing homes, hospitals, residential treatment centers and senior-care facilities, to name some. Museums, he points out, have some natural advantages since they can bring in traveling exhibitions, “each of which is an independent draw.”
The bonds often are underwritten by investment companies such as Goldman Sachs and Morgan Stanley, and many are insured. Insurance tends to up the rating and lower the payable rate.
While most museums view the money generated through bonds as a source of readily available cash when expanding or making renovations, the Walker Art Center saw bonds as a long-term source of revenue and sought to expand its facility in 2001. This involved the purchase of an adjoining piece of land for which a capital campaign was initiated.
According to Mary Polta, chief financial officer, the Walker drew down money from its endowment to pay for the land and building costs. In October 2001 the Walker issued 20-year fixed rate bonds of $11.425 million at 5 1/8 percent interest, “because we thought we could make more than 5 1/8 over the life of the loans,” which would replenish the endowment and then some, Polta explains.
The first couple of years were rocky for the institution, she notes, because financial uncertainty in the investment markets following the terrorist attacks on the World Trade Center and the Pentagon resulted in losses. “We weren’t always exceeding our debt service,” says Polta, but an upswing in the economy since then has put the Walker in the black. Polta expresses confidence that over the course of 20 years the Walker will come out ahead.
A similar situation occurred at the Nelson-Atkins Museum. There, 30-year fixed (5 percent) and variable (2-4 1/2 percent) bonds were issued in 2001 ($160 million) and 2004 ($60 million) in order to generate more revenue for the endowment at a time of the museum’s expansion and renovation, says Bill Markey, the museum’s director of finance. Over the first five years, he notes, the museum averaged 7 1/2 percent on its investments, although in 2006 the return jumped to 15 percent.