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* The Tribune ran a story not long ago about a $90 million bond sold by the Field Museum that it didn’t have enough resources to service. Some of the juicier parts…
Although the bonds, issued in September 2002, were rated as investment grade, there were signs that the Field might not be ready to take on that much debt. Less than a year before, museum staff assessed the Field’s bond capacity at only $50 million, according to a letter submitted to the state. […]
The loan was risky not just in size but in structure. Unlike previous bonds the Field took out, it allowed the museum to make lower interest payments up front and push off bigger ones until later. Meanwhile, no principal was due until the loan matures in 2036.
The bond pushed the museum’s total liability to $200 million — more than the $189 million in assets it had available to pay off debt, according to the Field’s audited financial statements. The Field’s total annual bond debt payment rose from $2.4 million in 2002 to $4.9 million in 2003 It now stands at $7.5 million.
Looks like those crazy no-principal mortgage loans which were all the rage right before the economy collapsed.
Keep in mind that Chicago’s elite financiers have always played a huge role on the Field Museum’s board (and on Bruce Rauner’s campaign, but that’s another story). And those guys appeared to do to the Field what some of them also did to the entire planet.
* Cooking the numbers…
After nine years of deficits, the Field finally started showing an operating surplus in 2009. But the improvement was due mostly to a change in accounting practices rather than a financial turnaround, according to a Tribune analysis of the museum’s financial reports. That year, the museum stopped counting depreciation — wear and tear on the museum’s building and exhibits — as an annual operating expense. […]
Yet the museum pointed out the surplus to its lenders in an August 2012 bond document filed a month before McCarter’s retirement. The filing did not highlight the new accounting method, asserting instead that positive operating results were accomplished through “the continued implementation” of the fiscal stability plan launched in 2010.
* Golden parachutes…
That same year, McCarter announced he would retire and the museum paid him an $874,375 bonus that more than doubled his overall pay from the previous year, according to tax filings.
* Which combined, of course, to force the Field to do things like eat its seed corn…
By 2011, the rating agency Standard & Poor’s had lowered its outlook on the Field’s 2002 bond. Facing the threat of a slip in its credit rating, the museum used money from its endowment to pay down $12 million of its debt — a move that most museums try to avoid because they depend on investment income from endowments to operate.
* And jack up entrance fees and cut the budget…
Lariviere also plans to cut the museum’s budget, which was about $63 million in 2011, by $5 million. He has said $3 million of the cuts could come from what used to be the museum’s century-old science departments, now merged into one.
The Field employs 27 curators, scientists who discover new species and uncover artifacts that illuminate ancient cultures. They help design exhibits but also collect specimens around the world and publish internationally known research. The Field had 37 curators in 2000 but lost 10 and has not replaced them.
Oy.
posted by Rich Miller
Monday, Mar 11, 13 @ 10:30 am
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=== That year, the museum stopped counting depreciation — wear and tear on the museum’s building and exhibits — as an annual operating expense. ===
You can do that? Just stop counting certain expenses? I thought GAAP required a standard set of accounting practices.
Holy guacamole.
Comment by Formerly Known As... Monday, Mar 11, 13 @ 10:44 am
So, um, this means we just solved Illinois budget crisis too, right?
Excellent. Pay raises all around. Governor Quinn and legislators, you may now take the rest of the year off.
Let’s issue a few more bonds while we’re at it as well. Just because.
Comment by Formerly Known As... Monday, Mar 11, 13 @ 10:47 am
===You can do that? Just stop counting certain expenses?===
Perfectly legal.
Comment by Rich Miller Monday, Mar 11, 13 @ 10:48 am
Fraud in Illinois? Moi?
Honest officers, we run a non-profit, so we didn’t believe we needed to observe any GAAP guidelines, ethics, or standards!
We feel so bad!
Comment by VanillaMan Monday, Mar 11, 13 @ 10:49 am
== The Field employs 27 curators, scientists who discover new species and uncover artifacts that illuminate ancient cultures==
Why not partner with one of our many local universities to perform these tasks?
Also, how about augmenting the cut curator staff with a volunteer program?
Comment by Woody Monday, Mar 11, 13 @ 10:57 am
Wow. Hopefully the museum can get out from under this monstrosity without more damage to staff and actions that will end up pushing away museum-goers.
Comment by Precinct Captain Monday, Mar 11, 13 @ 10:57 am
I just spent the night there with my daughter for a Girl Scout overnight. It’s still an amazing place, and it’s undergone some neat upgrades in the last 10 years. I hope they don’t screw it up.
Comment by Lefty Lefty Monday, Mar 11, 13 @ 11:02 am
Thanks, Rich. I was just reading up on this separately and saw your reply. Appreciate it.
Talk about cooking the books. Man.
Comment by Formerly Known As... Monday, Mar 11, 13 @ 11:07 am
I am perpetually amazed at the ineptitude demonstrated in public and non-profit finance. No principal until 2036? How does anyone morally recommend this from any side of the table? This isn’t a private capital venture, this is a terrific museum for the public that a lot of people made money off of (bond counsel, bond issuers, etc) and they had to know it was a bad deal. How some people sleep at night is beyond me.
Comment by Shemp Monday, Mar 11, 13 @ 11:13 am
Rich, are you saying anyone can do this, or just not-for-profits? Wouldn’t a publicly listed corporation have all sorts of problems if they quit using GAAP?
Comment by Anyone Remember? Monday, Mar 11, 13 @ 11:41 am
Shenmp, while I agree that capitalizing the interest payments is foolish, a strategy of putting the principal off isn’t necessarily a bad deal for a long term non-profit institution. It’s a common practice and not morally bankrupt.
Comment by ChicagoR Monday, Mar 11, 13 @ 11:46 am
That’s a pretty funky bond to get an investment grade rating based on permanent, increased future attendance.
What was the underlying collateral? The endowment? Sue the Dinosaur? The dioramas?
Comment by wordslinger Monday, Mar 11, 13 @ 12:11 pm
too bad. this is one of those very very special places that puts chicago among a very very small handful of cities in the world. lots of places have special stadiums or monuments or art museums but expensive museums like this are like aircraft carriers and nuclear weapons-only the big boys can have them.
Comment by Shore Monday, Mar 11, 13 @ 12:28 pm
I hope Sue won’t have to sell herself to make ends meet
Comment by I don't want to live in Teabagistan Monday, Mar 11, 13 @ 1:02 pm
-ChicagoR When it is a TIF, or a revenue bond where there’s an investment that is made to generate long-term revenue gains, it is fine in my mind to capitalize some principal, but for the entire amount, that to me is beyond the pale. It’s one thing to ramp payments up knowing that the first year or two are the most difficult, but paying nothing but interest for a non-profit museum in a non-bailout/last ditch type of situation is just wrong in my mind, especially with a term exceeding 20 years.
Comment by Shemp Monday, Mar 11, 13 @ 1:54 pm
Shemp: I come from the university sector, and I believe you’ll see many universities have debt with a ‘bullet’, paying only interest for many years with no amortization. Given the ability to refund and reborrow whenever interest rates are low, it’s not surprising.
Comment by ChicagoR Monday, Mar 11, 13 @ 2:03 pm
The Field isn’t going to have a science department anymore. They’re going to sell off rare books in their collection. After the Field, the dysfunction in Springfield and recession due to the banks and Wall Street, I have come to the conclusion that wealthy people really don’t know how to manage people or social institutions for the greater good. The president of the Field was given over $800K before he left.
Comment by Emily Booth Monday, Mar 11, 13 @ 2:30 pm
FKA - The museum still took depreciation expense. They just charged it as a non-operating expense. Their total change in net assets (net income, basically) is the same regardless of whether depreciation is charged as a non-operating or operating expense.
That said, it’s pretty darned unusual to account for depreciation as a non-operating expense. Not sure if it’s a violation of GAAP off the top of my head, but it is highly unusual, if not an outright violation of GAAP.
Given that the Museum changed auditors in the same year as they changed depreciation expense from operating to non-operating…well, it makes you wonder.
Comment by jerry 101 Monday, Mar 11, 13 @ 4:51 pm
Normally, in this situation, an institution like the Field would just go back to IFA and set up a new bond issuance to refund the old debt and issue new debt with more favorable terms (especially in the current interest rate environment). However, looks like the museum went and took out variable rate debt back in the day, and now the museum is $26 million in the hole. Which is probably why they aren’t just refinancing the debt.
To answer shemp’s question, bankers get into the offices of NFP and Government finance departments and convince them to do things that are very bad for the NFP/Gov, and very good for the banker. They sell things like swaps as this great idea, while playing down the downside risk, then the bank just shrugs when the NFP/Gov inevitably loses the gamble. I wouldn’t say it’s really ineptitude on the part of the NFP/Gov finance department - they’re just over their heads. Their banker, who they trust (hah!) talks them into something that is way beyond their knowledge level, and the price gets paid. Wasn’t even the bonds that are the problem, it seems to me. It’s the decision to enter into a swap. The counter party is doing great though (usually Goldman Sachs or one of the other big investment banks).
Regarding GAAP, given that the museum says it’s using GAAP, violating GAAP could be a bit of a problem, if treating depreciation expense as nonoperating is a violation of GAAP (as I previously noted, very unusual, but there may be something I’m not aware of which would allow it), then there could be some problems for the museum with it’s bond holders, especially if the reclassification causes the museum to appear to be in compliance with a covenant that it hasn’t complied with.
Since the debt is issued through IFA, there could also be SEC implications as the Museum’s debt is probably considered public debt.
Comment by jerry 101 Monday, Mar 11, 13 @ 5:17 pm