Tuesday, October 18, 2005

Lunchtime Notes: Refinancing The Overture Center

by Tom Bozzo

Here's something of a request post, as Paul Houseman exhorted me in the comments to turn my attention towards Madison and say something about the Overture Center for the Arts, the city's nearly complete $205 million performing and visual arts palace funded primarily by local philanthropst W. Jerome Frautschi. Mr. Frautschi's megafortune was derived in large part from his stake in his wife's almost unfathomably successful business.

The city council is set to vote tonight on a complicated plan to refinance the center's construction debt (backed by a city guarantee) such that the center's endowment will be able to pay off the construction debt and still provide for the facility's long-term update. The Cap Times reports that the council narrowly favors the plan by downtown Ald. Mike Verveer's tally, though not by enough to sustain a possible mayoral veto.

What's not to like? Apart from some longer-term issues regarding the city's possible obligations that apparently remain fuzzy, the taxpayer's obligation to the center under the plan depends on the endowment's ability to obtain an 8% return on its investments. The mayoral alternative, which would involve liquidating the endowment to pay off the facility, which would then be transferred to city ownership, would put city taxpayers on the hook for Overture's upkeep, though to an extent that looks more predictable on its face. On the other hand, the board of the nonprofit Arts District contends that maintaining ownership of Overture would make subsequent fundraising easier.

My first thought is that the Arts District doesn't know the meaning of the saying, "once bitten, twice shy." The original Overture gift was structured — at the tail end of the stock market bubble — to fund construction and maintenance of the facility, and certainly also reduce the required Frautschi gift (not that there's anything wrong with that), under the assumption that the endowment would earn 9% average annual returns. In 1999, that must have seemed like the height of investment conservatism, but we all know how that turned out. (The endowment has recovered in the last couple years, but not nearly to the originally planned extent.) So now a percentage point has been shaved off as a concession to post-bubble sobriety.

Should the city take the bet? I'm leaning toward siding with Mayor Dave on this one. Both the volatility of returns, and the profile of realized returns, matter, arguably more to the city as the guarantor and maker-up of certain shortfalls in the returns than to the Arts District. The timing of the gambit is particularly nerve-wracking, as practically every asset class in which the endowment could be invested appears to be richly priced, so it's hardly inconceivable that the first couple years' returns could badly underperform the longer-term expectations to the city taxpayer's detriment. The Arts District should bring more capital to the table and try again.

Later: The Mistake on State? Density and Development in the Progressive City.

Update 10/19/05: The results.
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