Why Should City Residents Be Coerced Into Expensive Bailout of Overture Center?

On June 22, 2010, three organizations, critical to the ownership and operation of the Overture Center for the Performing Arts in Madison, Wisconsin, executed a forbearance agreement with a consortium of lenders that were owed over $28 million dollars. In 2005 these lenders provided financing under a complicated financial arrangement that soured when the stock market collapsed in 2008.

Who Negotiated the Deal (not the city of Madison)

The three interested parties included the Madison Cultural Arts District (MCAD), a public body created under state law that presently operates Overture, and the Overture Development Corporation (ODC), which owns the building.

The third member of the consortium was the 201 State Foundation, presently a private fundraiser for Overture and the required new operator of Overture by terms of the proposed forbearance agreement.   

Although the agreement requires certain actions by the city of Madison, as best I can ascertain, the city did not negotiate the agreement. Clearly the city of Madison is not a party to the agreement. This becomes critical since exercising certain parts of the agreement may violate city ordinances as well as state law.

The City is Obligated Under the Forbearance Agreement

The agreement contains three critical elements for Madison residents and their city government.

The terms require execution of the agreement by December 31, 2010. Secondly, the city of Madison must agree to purchase or otherwise take title to the Overture Center and all of the associated risks of ownership. Thirdly, the 201 State Foundation or its chosen successor will operate the facility.

These terms were imposed and inserted by the Overture Parties (MCAD, ODC and 201 State) not the lenders.  The lenders want their money, they do not care who owns the building if they are paid.

The Overture Parties, without participation by the city of Madison or its residents who will pay the bills, imposed these terms. If at any time you believed that the banks imposed these conditions, rethink the matter.

The Overture Parties, without consideration for the time required for a deliberate and thoughtful response by the city of Madison, imposed these terms.

Originally I Supported Public Ownership

When I agreed to serve on the Ad Hoc Overture Committee, I supported public ownership of the facility.  I was committed to making that work and finding the best operating model. I ranked the possible alternatives of ownership and operations as first:  public/public; secondly, public/private; and lastly, private/private.

I am now convinced that private/private is the best alternative.

I arrived at that conclusion for two reasons. First, the cost of owning the building is beyond the resources of the city. Secondly, the controlling entity that operated the building must have a sound management plan, the confidence of the public, and an appreciation for transparency.

In a later article I will detail the specific problems with public ownership, but past history demonstrates that the proposed Focus Model and the forbearance agreement provide sufficient proof that only under the most unusual of circumstances will public ownership or management work.  

The Building Is Too Opulent and Costly To Own

The building is too expensive for the city to own. Overture was designed and constructed with no regard for public ownership. This is evidenced by the soft floor tiles that were meant for walls, not the pressure of high heel shoes.  There are 700 different style lamps (think light bulbs), many of which are not available ‘at retail’ and which are lacking in energy efficiency.

When the lamps are no longer manufactured or when there is a legitimate desire to make the building green, entire fixtures built into the walls and ceilings will have to be ripped out.

Finally, the published cost of the building is incorrect. The facility did not cost $205 million. For the last five years, I used the figure of over $250 million. It is clear that I was wrong. The cost of Overture is closer to $300 million.

This number is critical because it provides a guide as to the long-term capital cost to maintain the facility. These are not the costs of day-to-day operations but the kind of costs associated with replacing roofs and boilers, curtains and seats.

If we assume that over forty years it will cost 40% of the original construction, we are looking at $120 million, not $81 million, already a massive figure.

If the City Owns and Leases a $300 million facility, we need public bids. Transparency would also help.

On the management side, the arrangement for 201 State to operate the facility becomes more unnerving.

The very nature of 201 State negotiating the forbearance agreement, naming itself as operator, and presuming city ownership tells us what lies ahead. 201 State is adamantly opposed to transparency.

Perhaps someone should ask why the city of Madison should provide a public subsidy of over $2.5 million a year to this ‘vendor’ without competitive bid. There may well be other qualified operators, both public and private, interested in running Overture, if there is a guarantee of city subsidy combined with assurance of the city’s contractual obligations to maintain the building.

Of course, the city will probably not want to insult any donors and will manage to determine that bids are unnecessary because of the viability of this single source provider.

Author's note: more soon on structure, finances, the perfroming arts, and the Crystal Cathedral.

Comments

[Pete Gruett]

Considering the fact that pending maintenance costs for the civic center were actually greater ten years ago then the ones for Overture are now ($15 million over 5 years for the CC vs. $19 million over 15 for Overture), I'm not sure I see your point. If we could afford that then, why can't we afford this now with ten years of free use behind us? Madison is a much larger city than it was when the Civic Center was built and it's still growing, yet we keep insisting we're some sort of tiny midwestern hamlet saddled with a fancy, New York arts center.

If we can muster enough maturity to keep our heads and keep this thing open, we might yet grow up before someone decides to pour a concrete slurry floor over the stone and buy a bunch of sconces at Menards.

[Tom Bozzo]

When considering large sums spread out over long time periods, it's useful to offer some sense of scale. If city budgets stay about where they are in inflation-adjusted terms, the 40-year city capital budget expenditures will be on the order of $6.5-7 billion. So $120 million in capital costs for Overture is less than 2% of future capital budgets.

Likewise, a $2.5 million city subsidy would represent a $700,000 increase over the current ($1.8 million) subsidy, or about 0.3% of the operating budget.

So the argument that the facility is "beyond the resources of the city" is questionable at best. The real issue to address is whether the percent or so of city expenditures above what would have been spent on the old Civic Center is better spent elsewhere.

One other question, that perhaps might be addressed in the 'structure' post. If the (legitimate) concern is accountability of the operator, why not give 201 State a limited-term concession?

[One Thin Dime]

I agree that if the City is going to own it, the City should get to decide who runs it, not the people who drove it off the financial cliff in the first place.

[Noel Radomski]

Excellent information, thank you.

[Bob D'Angelo]

MCAD and 201 State were not responsible the the current situation. Investing at the wrong time by the current owner The Overture Development Corporation caused by the problem with the banks. The operating budget is completely separate and is supported by ticket sales, rentals, fees and a contract with the City to operate the place in the community interest. Thur far the city has saved about $10,000,000 in capital maintenance costs for the old Overture Center.

The real problem is the long term maintenance of the Center. Paul's figure of $120,000,000 over the next forty years may actually be low using examples of what costs were incurred by other centers facing renovation over the years... To solve that pending obligation will take a very substantial endowment.

[Linda Baldwin]

Just to set the record straight.

The City of Madison wasn't involved in the bank debt negotiations because they refused to be. Time and time again, the Mayor indicated that the city would not be a part of the debt settlement. He also indicated that once the debut was settled, the city would work with Overture to determine a sustainable future.

So members of the volunteer and appointed boards, in order to save the Overture Center from going dark or being foreclosed on, moved forward with negotiations with the financial institutions to resolve the debt issue. Conditions of that settlement were imposed by the parties involved and the city was made aware of those conditions during the negotiations.

[Paul Beard]

Casino.