Arts institutions feeling impact of sick economy

updated 8:03 p.m. ET April 28, 2008

NEW YORK - When the J. Paul Getty Trust in Los Angeles was seeking to finance the purchase of art works, it did what cultural institutions often do to raise money: It issued bonds.

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.

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