The Price of Liberty is Eternal Vigilance
The Aquarium - a potential problem for the City?
Warwick Jones, Editor
Last year the South Carolina Aquarium (SCA) incurred a loss of $2.4 million. This year, most likely another loss will be incurred though hopefully much less than in 2003. But cash flow could fall further and create a need to draw further on borrowings. The question is how much further can it draw and what could be the ramifications for the City of Charleston?
Readers who wish to see a record of the financial performance and a statement of assets and liabilities of the SCA should access our posting of September15. In this posting we made some estimates as to cash flow in the next 2 years. We assumed that gifts, grants, membership dues and admission charges in aggregate would rise slightly above that of last year. We also forecast that the cash flow would be mildly negative and suggested that the SCA may be forced to borrow to finance operations.
Borrowings amounted to $8.7 million at the end of 2003. We don't necessarily expect an increase this year but considering how dependent the SCA is on gifts and grants, there is always a risk that cash flow could deteriorate and that further borrowing from the line of credit would he required - if not this year or next, sometime in the future.
Last year, the SCA received $840,000 in gifts and grants. It is unlikely that these would ever fall to zero, but it does show the vulnerability of the SCA. In a very worst case scenario with no gifts or grants, it is possible to see cash flow fall to a negative $1 million.
Possible breach of lending covenants
And there is another problem. The losses that have accumulated over the years have lessened the net assets on the balance sheet. In our opinion, there will be operating losses again this year and next, even if cash flow is positive. The reason lies with the fact that the SCA, like all non-profits and corporations, is providing for depreciation of its assets. This provision amounted to $1.3 million in 2003 and most likely will be at a similar level this year and next. Considering that the aquarium opened in 2000, the depreciation is at a very aggressive rate and will cause the fixed assets of the SCA to have negligible book value within the next 6-7 years.
Given the current trend, the key accounts of the SCA could ultimately show a deficit on the balance sheet and theoretically at least, not support a mortgage of $8.7 million or whatever. This type of "alarm bell" rings in the risk assessment departments of lending institutions. They may require that the loan be put into the potential "non-performing" category. In such a case, the lending parties would be required to make some provision for a potential loan loss, a move that would adversely affect reported profits. This in turn could force them to more aggressively pursue total repayment of the outstanding balance. It is of interest to note that the terms of the loan made to the SCA have been re-negotiated a number of times. The last re-negotiation extended the term of the loan to January 5, 2005. It also required 4 quarterly payments of $100,000 beginning April 24 2004. There were also caveats relating to cash receipts and savings relating to the Fountain Walk office space. The interest rate was floating in line with the lender's Prime rate.
Do we believe that the loan is at risk for the lending body? Not really, the assets clearly exist and have considerable value. What that value would be is too much of a guess but it would be tens of millions in replacement value in our opinion. But there is another and more important reason why there is probably little risk for the lender.
City of Charleston may be required to take over assets and liabilities
The City of Charleston may not technically guarantee the mortgage and debts of the SCA, but its does indirectly. The Aquarium is built on land that is owned by the National Parks Service. This land is leased by the City of Charleston which in turn subleases to the SCA, the entity that operates the Aquarium. In the sublease, obligations are defined in the event of a default on the part of the SCA. Our reading interprets the sublease as obliging the City to takeover the assets and liabilities of the SCA and accept the responsibility of all expenses in the event of default.
" In the event that this Sublease is breached by the SCA and is thereafter terminated by the City , then , subject to any restriction placed on any grants, bequests or contribution by the applicable gift instrument or other financial obligations of SCA, SCA shall convey the Retained Assets to the City ( together will all investment income, gains or losses thereon and all expenses chargeable thereto) for the support or benefit of the Aquarium or for programs which support or benefit the Aquarium, and the City shall not use the Retained Assets for any activities which are not consistent with such support" Sublease Agreement 1997
Of course there is a lot more in the Sublease Agreement but this is what we believe is the critical paragraph.
Will the City suffer that much?
We are not bond experts and we can't define the impact of the addition of $8.7 million plus to the liabilities of the City. But certainly it would not help and conceivably hurt the City's high standing in the eyes of Bond rating services.
Again, and assuming interest rates remain around present levels, the interest and bank charges on the debt amounts to about $450,000 a year. This is not too onerous for a city with a budget of over $100 million, but the impact might be greater if the City have to pony up say another $500,000 a year to amortize the loan. And it would certainly be a heavy burden if gifts and grants melted to negligible amounts.
Is possible default driving the City in other issues?
We have often wondered whether the possibility of default and the need for the City to take over the assets and liabilities of the Aquarium were the driving forces to its desire to develop Ansonborough Field and build an African-American Museum on an adjoining site. We suspect that the City assumes attendance and viability of the Aquarium would be boosted by such future developments. We can't help feeling that if this is the motivation, then something is out of proportion. The debt of the SCA is a problem, but not of a magnitude that will overwhelm the City's finances. Sure, default on the loan and the acquisition of the assets and liabilities by the City will be bad publicity for the Mayor who has made some bold pronouncements in the past about the success of the Aquarium. But recognizing that the Aquarium is going to cost the City more than first envisioned is possibly a smaller price to pay than what is now being imposed. - new height restrictions at Ansonborough Field, loss of green space, higher buildings in the Ansonborough Field area and arguably, the loss of the McLeod Plantation to the School of Building Arts. The Plantation has been proposed as a site for the African-American museum, a site far more worthy considering its history, and far cheaper considering the $30 million price tag on the proposed museum to be constructed near the Aquarium.