High Culture, Meet Low Revenue

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Across the country and in New York City, museums and other cultural institutions are trying to cope with lower revenue brought on by big declines in donations and losses on investments even as admissions hold steady.

The national economic downturn and the credit crunch also have made it more difficult for such institutions to access the credit markets.

In the Big Apple, the Trust for Cultural Resources of the City of New York sells tax-exempt bonds on behalf of nonprofit cultural institutions.

“It’s pretty slow at the moment,” said Donald Elliot, secretary for the trust since the 1980s. “It doesn’t look like there will be much borrowing [in 2010.]”

In the past 10 years, the conduit issuer has sold $1.42 billion of new money bonds and $1.14 billion of refunding debt, according to Thomson Reuters. In 2009, it sold $195 million of new-money bonds and $238.3 million of refunding bonds.

Over the past two years the trust did $759.2 million of refunding debt, That was in part due to the collapse of the market for auction-rate securities, which prompted borrowers to convert their floating-rate debt to fixed-rate bonds or variable-rate demand obligations.

Some of New York City’s premiere cultural institutions have sold debt through the trust, including Carnegie Hall, Lincoln Center for the Performing Arts and the Metropolitan Museum of Art, as well as the Juilliard School and the School of American Ballet.

The American Folk Art Museum, which used the proceeds of $31.9 million of bonds issued through the trust in 2000 to partially finance construction on a new building, disclosed in November that since July it had not been making monthly payments totalling $1 million to its debt service fund.

“The institution anticipates that it will not be able to resume these or any other payments with respect to the bonds for the foreseeable future,” the disclosure notice said.

The Midtown Manhattan museum said in the notice that it believed its debt service reserve fund was sufficient to cover January and July 2010 interest payments and the July 2010 principal payment. The reserve fund contained $4.2 million as of June 30, 2009, the end of the institution’s fiscal year, according to draft financial statements disclosed last week.

The museum’s revenue, including public support, dropped nearly in half from fiscal 2008 to fiscal 2009, the draft financial statements said. It had revenue totaling $3.2 million in fiscal 2009 compared to $6.4 million in fiscal 2008. Revenue sources that saw the biggest drop in fiscal 2009 included investment income, which posted a $2.1 million loss. Support from foundations and corporations totaled $365,215 compared to $688,760 the previous year, and revenue from special events and benefits declined by $612,839 to $1 million.

At the end of calendar 2008 and fiscal 2009, the museum was not in compliance with bond covenants requiring it maintain a 1.6 times ratio of assets in its debt service reserve relative to outstanding principal, according to the draft financial statement. The museum also failed to raise $5.6 million of gifts, grants, bequests, donations and contributions in fiscal 2008 and fiscal 2009 as required by bond covenants, though the 2009 violation was waived, statement said.

The museum is unrated and the bonds were issued with ACA Financial Guaranty Corp. insurance.

A spokesman for the museum said that questions about its debt needed to be answered by its chief financial officer, Robin Schlinger, who was unavailable last week due to the holiday.

Like other bond issuers the cultural sector has felt the impact of the implosion of the bond insurance industry.

“The role of the insurers has changed,” Elliot said. “We don’t require it in the same way that we used to.”

The trust required bond insurance on a case by case basis.

Institutions looking to borrow without using bond insurance have had to go to the rating agencies, in some cases to get credit ratings for the first time.

“The underlying rating, or the credit quality of the organization of itself plays a larger role,” said Moody’s Investors Service analyst Dennis Gephardt. “We’ve rated some of these organizations for the first time in just the last couple of years  ... and if you expand beyond the world of New York cultural institutions there’s a very long list that got a rating of their own for the first time.”

Moody’s gave Carnegie Hall its first rating in November — A1 with a stable outlook — when it was going to market with $110 million of bonds through the trust in part to refinance auction-rate securities issued in 2002.

Moody’s has not downgraded or changed the outlook on any of the institutions that borrowed through the trust, Gephardt said.

“We’re trying neither to overreact nor under-react to the particular climate with our long-term ratings,” he said. With “one year of a thin but still healthy debt service coverage — we wouldn’t want anyone to think that that would automatically lead to rating pressure.”

Endowments and gifts tend to be an important revenue component for cultural institutions.

“They’re managing through both a reduction in the endowment payout in many cases from asset losses and at the same time some of the donors are feeling less generous because they’ve had similar asset losses,” Gephardt said. “So we’re in an environment belt-tightening all around.”

Moody’s looks to see how museum management reacts to the revenue changes so that there’s still healthy cash flow in support of debt service, he said.

“It’s been a very difficult time for the whole nonprofit field and museums certainly are part of that,” said Ford Bell, president of the American Association of Museums. “Corporate giving has been decreased, individual giving has been decreased. State and local support of museums, which is never big, certainly has been affected.”

Some institutions have either delayed or cut back on planned capital projects, in part because major donors have cut back, according to Bell.

“I know from talking to museums that some major donors who had made five-year pledges have said they’re [now] giving over seven years instead of five years to accommodate their own needs,” he said. “There are lots of institutions that are trimming that are making adjustments to plans that they had in order to accommodate the severe downturn in the economy.”

To cope with lost revenue, many museums across the country have instituted hiring freezes, cut staff, and cut back on blockbuster shows, Bell said. Even as revenues have fallen, museum attendance has not.

“Museum attendance is way up across the country, which is very typical of any type of downtime,” he said. “Museums are still cheaper than baseball games or movies, and they’re also something people know — they’re a familiar place, people go to museums in difficult times.”

Admissions only account for 9% of most museums’ budgets, which lessens the revenue impact of increased attendance, Bell said.

The International Center of Photography, a photography museum and school, is in the early discussion stages of a new capital program but nothing is imminent, said deputy director for administration Stephen Rooney. The ICP used the proceeds of $11 million of bonds issued by the trust in 2000 to build out the leasehold facilities it occupies in Midtown Manhattan.

“We’re in the planning process now,” Rooney said. “It’s been somewhat slowed by the [economic] environment but it has not been set back.”

Cultural institutions face a conundrum: With real estate values depressed, it’s a good time to buy land and expand — but giving by individuals, a major source of capital funding, has gone down.

“We’re all facing basically the same thing with respect to capital projects. There’s a tremendous opportunity in real estate right now, it’s a dramatically depressed real estate environment,” Rooney said. “On the other hand the culturals also require a tremendously generous philanthropic base to do these capital projects. The bond financings are usually just a way to bridge culturals to their capital campaigns or fund relatively small portions of the projects.”

Corporate giving virtually dried up while individual giving remained flat, he said.

“The philanthropists are still there in New York City, they’re still very vibrant and active and committed to their favorite charities but they’re cautious in ways that they weren’t cautious two years ago,” he said. “There has been a huge shock to the system and to everybody over what’s happened over the last 16 months and people are really not over that shock.”

The ICP hasn’t yet tested the real estate market or fundraising for a new capital program, but it will eventually, Rooney said.

“Cultural facilities generally take a couple of years once you acquire sites to design, and another couple years to build,” he said. “The earliest that we would be building out a new facility would be 2014.”

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