Art museum discount rate datapoint of the day

By Felix Salmon
September 8, 2009
seems that the Long Beach Museum of Art would rather lose $569,000 in annual operating support from the city of Long Beach than repay the principal on a $3.06 million loan. I find that hard to understand: it should just take the $569,000 and use some fraction of it to pay off the $3 million over time, spending the rest on art and programming. Or is there some good reason why the museum's implied discount rate is so incredibly high (over 18%)?

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It seems that the Long Beach Museum of Art would rather lose $569,000 in annual operating support from the city of Long Beach than repay the principal on a $3.06 million loan. I find that hard to understand: it should just take the $569,000 and use some fraction of it to pay off the $3 million over time, spending the rest on art and programming. Or is there some good reason why the museum’s implied discount rate is so incredibly high (over 18%)?

(Via Maneker)

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Comments
4 comments so far

I can’t imagine it is because they don’t understand the time value of money. I think they are thinking they can keep the $569 and not repay the debt at the same time — so socialism, and not financial ignorance — wins. (Although after dealing w/ some nonprofits, it is clear that the smaller ones will definitely make poor financial decisions b/c they get steamrolled by the Street.)

Once they admit that they owe $3M on the bonds, there will be no way to avoid payment other than default (sure loss in either case) and in return they get funding in a yearly city budget that is subject to change every year. On the other hand, if they deny responsibility, maybe they lose funding and maybe the city caves (unsure thing). In the current CA economy, would you really rather take on a 3M liability than risk losing the asset of future city support subject to yearly budget votes?

Posted by najdorf | Report as abusive

18% would work if the city was planning on setting up a risk-free annuity of $569k and hypothecating it to the museum. As a discount rate on something that looks like a very dicey bird-in-the-bush, it’s not unreasonable.

Posted by dsquared | Report as abusive

I somehow think the art world could survive the closing of a museum at which (apparently) the hot upcoming exhibits are “…exhibitions on baseball-related art and the art of the tattoo…”

Posted by Donald A. Coffin | Report as abusive
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