LACMA’s bond rating downgraded; Govan says it’s no big deal

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The Los Angeles County Museum of Art’s bond rating has fallen from A2 to A3 in a downgrade by Moody’s Investors Service. Moody’s warns that if the museum’s investment portfolio were to lose a third of its value in a market meltdown, LACMA would be thrown into default.

But the museum’s director, Michael Govan, says ‘that is an extremely unlikely situation,’ given that the museum’s investments are significantly more conservative than they were when the portfolio shrank 23.4% during the global financial crisis of 2008-09.

Govan says LACMA’s financial position is better now than it was in November, when Moody’s last rated its $383 million in construction bonds and left the A2 rating in place. The main thing that’s changed, he said, isn’t the museum’s financial solidity but that financial ratings services such as Moody’s and Standard & Poor’s have become tougher graders in general. They’ve come in for withering criticism for failing in their watchdog function before the meltdown.

Read: LACMA’s bond rating drops to A3

Nevertheless, Govan acknowledged that the downgrade figures to cost the museum in the form of higher interest rates on its bonds.

He said LACMA has been paying about 3.5% interest -- rates that are reset weekly depending on market fluctuations. The total came to $14.7 million in interest payments during fiscal 2010-11 for the borrowing that has enabled LACMA to take a build-now-pay-later approach in an ongoing expansion and renovation that has yielded the Broad Contemporary Art Museum, Resnick Exhibition Pavilion and other improvements.

A key reason Moody’s gave for the downgrade was that LACMA has raised only $335 million in the $450-million capital campaign it launched in 2005. Apart from the debt situation, Moody’s gave LACMA high marks for its regular financial operations. The Segerstrom Center for the Arts in Costa Mesa and the Natural History Museum of Los Angeles County are others in a boat similar to LACMA’s. All issued long-term, tax-free bonds before the recession to fund immediate expansion. All have faced rough going trying to raise big enough pots of capital campaign money.

If all had gone well, those pots would be big enough for the investment returns they generate to cover the interest on the bonds. But when capital campaign donations are insufficient, money has to be drawn from other accounts to pay the interest. And that’s money that otherwise could have been used for general purposes such as exhibitions, acquisitions and performances, hiring and staff raises, educational offerings, or keeping down admission fees.

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