Irrational Exuberance and the Overture Center Clustercuss

The Wisconsin State Journal ran a front-pager by Dean Mosiman yesterday on plans being hatched in Mayor Dave’s office for a city take-over of the Overture Center, our absolutely fabulous but debt-ridden arts facility in Downtown Madison.  The state of affairs is the result of an arrangement whereby about half of the donation was put into a trust fund that was intended to pay off a construction loan and generate additional income to support center operations.  Unfortunately, as I pointed out at Old Marginal Utility, the fund was undercapitalized and so needed to produce roughly 9% annual returns to make ends meet.  Alas, the plan was hatched in the late 1990s when this probably seemed like the height of conservatism.  A late-2005 refinancing, strongly opposed by the Mayor, reduced the required return to about 8.25 percent, but was particularly susceptible to losses in the early years.  D’ohh.

A companion piece by Mosiman doesn’t shed a lot of light on the fund’s history, but in Old Marginal Utility days I took a close look at the trust fund’s investments on behalf of our alternative weekly, Isthmus, and declared them a mess:

The interesting question is why they stayed in cash for so long post-refinancing. Pardon me for thinking that the financial geniuses behind the refinancing might have had an investment plan ready to roll upon approval. None of the obvious answers — they didn’t have a plan, the Cash Era represents an inept plan, and they chose a deliberately defensive position to avoid the political embarrassment of a quick I-told-you-so from refinancing opponents — is confidence-inspiring.

As it happened, the fund did get out of cash and into alternative investments, one of the biggest of which was the Fairfield Sentry fund.  That fund turned out to be the most consistent producer of returns.  While in April of ’08 I declared it a black box, we now know that the box was Bernie Madoff’s Ponzi scheme; had the Overture trust performed slightly better and not been liquidated in the Fall of ’08 in advance of the Madoff debacle, the refinancing scheme would have suffered an even worse collapse as nearly 20% of the trust was with Madoff via Fairfield.

I can only imagine what the crazies are saying in the madison.com comments section, but settling the remaining construction debt and turning the center over to the city is not exactly radical under the circumstances — indeed, it’s more-or-less the path not taken when the 2005 refinancing was being considered.  The City doesn’t (or, at least, shouldn’t) want a prime downtown block going dark, the center’s lenders would surely be out more than the $6 million or so cramdown that the city is looking to stick them with if they foreclosed*, and the major donor wants to limit his personal liability.  A screaming headline in the paper’s opinion section expresses strong support for a plan to redevelop the threadbare Edgewater hotel on Lake Mendota with a city subsidy of $16 million, but if resources are finite, then Overture would use of public money of a similar magnitude to the benefit of a much larger constituency.

* An interesting, and for now under-reported, part of the story is that the city claims that changes to the loan agreements when the trust was liquidated in 2008 let it off the hook for the portion of Overture debt payments it had guaranteed in the 2005 refinancing.

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