Marginal Utility

by Tom Bozzo

The story so far...

Rich Guy invests in wife's toy business. Wife sells business to Mattel, making Rich Guy a Super-Rich Guy. Now-Super-Rich Guy donates $205 million to turn Madison's dowdy Civic Center into the Overture Center.

Super-Rich Guy establishes financing scheme that purports to be able to pay for the Overture Center's construction and contribute significantly towards its operation and maintenance even though the construction tab is approximately $205 million. An assumption is that the trust will earn 9% average annual returns from stock market investments. The year is 1999 — oops.

In late 2005, the Overture Center's construction debt is refinanced in a controversial deal that involved the City of Madison guaranteeing a portion of the debt and possibly being on the hook for Center maintenance should the fund's balance fall below $104 million. (It was $109.3 million as of the refinancing.) The expectations for the fund's returns are shaved by 0.75% and the investment strategery is meant to emphasize "diversified investments that limit short-term volatility."

At the time, we were not impressed:

Now, I couldn't tell you whether the Overture trust will clear its rate-of-return hurdle even if I knew the details of its investments. As was seen in the Social Security privatization battle, predicting forward-looking returns is unavoidably contentious, and even if you could reliably predict expected returns, the realized returns' deviations from expectations matter — as Mayor Cieslewicz and the council's fiscal hawks emphasized. (And, echoing a point I made yesterday, he had stressed results from the city's fiscal efficiency auditor that the city bears especially large risks from poor near-term returns.)

What's basically incontrovertible is that the trust is undercapitalized. I'm inclined to agree with David White of AFSCME, who according to the Cap Times:

Reject[ed] claims that it would be easier to raise money for the facility if it were not part of the city as nothing more than "a talking point," White also said he did not trust markets in the next few years to deliver returns consistently above 8 percent.

Assuming the plan goes forward, the ball is in the foundation's court to put some action behind the assertion that the existing structure can do more for Overture than city ownership, raise some money, and thereby reduce the taxpayer's risk the old fashioned way.

So how did they do with that short-term volatility? Here's the Wisconsin State Journal account from early October, via Emily Mills:

The trust, which must be at least $104 million to meet all commitments, sank from $105.83 million on July 13 to $100.86 million on Aug. 15, doubling any prior decline and nearly forcing the district to tap other sources to meet debt payments.

The fund recovered to $103.31 million -- still below the $104 million mark -- by Sept. 28, according to the latest report by Madison comptroller Dean Brasser. The trust has since added another $400,000, the Overture Foundation said. [Emphasis added.]

Some timing, there. Looks like the Overture Foundation got into Big Shitpile with the impeccable timing for which it is becoming best-known. The question is, what's happened to the trust in the last few weeks?

Labels: High Finance, Madison