Market losses, credit crunch hit local nonprofits

October 10, 2008
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Between investment losses and the all-but-death of the municipal bond market, local nonprofit organizations are expecting fallout from October’s financial crisis to range from belt-tightening to delayed capital projects.

“Every day, the market is changing. Over the last three and a half weeks, every day has been a shock,” said Susan Springgate, CFO at the Kalamazoo Community Foundation, the largest of West Michigan’s community foundations, which is looking at ways to trim operating costs.

Grand Valley State University, which saw a Wachovia Bank-managed fund tie up $23 million for a time, is weighing whether to delay construction projects until the tax-exempt bond market rebounds.

Local hospitals said they’ve seen interest rates on variable rate bonds spike as high as 9 percent.

“We’ve been talking with our investment consultant quite a bit,” added Grand Rapids Community Foundation CFO Lynne Black. “We’ve always believed to generate long-term returns, you’re going to assume some risk. There are peaks and valleys, and right now we’re in a valley.”

How deep that valley might go was on everyone’s minds last week as the financial markets struggled. The drama included the $700 billion federal bailout package, huge losses in the stock market where the Dow Jones Industrial fell 800 points in one day early last week and investor snubbing the municipal bond market.

Normally working in a sedate, $2.6 trillion tax-exempt municipal market, backed by the full faith and credit of institutions such as hospitals, universities, schools, cities and counties, investors were further shaken when Jefferson County, Ala., appeared ready to default on $2.7 billion in sewer bonds.

“Credit markets have just about seized up across the country,” said GVSU finance Professor Greg Dimkoff. “That’s making the interest rates on munis much higher. It’s killed off the market.”

“There’s been no municipal bond market for the last three weeks, and that’s unheard of,” added Spectrum Health CFO Mike Freed.

Bloomberg reported last week that its data showed that $12 billion in bond and note sales had been delayed by issuers unwilling to pay sky-high interest rates to attract skittish buyers.

“We have had some private, internal conversations about our next priorities, but we haven’t yet rolled them out publicly,” said GVSU Vice President for Finance and Administration Jim Bachmeier.

“We do have facility needs and would, in the normal course of planning, be bringing facility projects forward in the next six to 12 months. And if the credit markets don’t get better, we probably won’t be bringing a project forward in that time period.”

Possibly delayed would be smaller construction work, such as classroom extensions. Bachmeier said the new $70 million Mary Idema Pew Library Learning and Information Commons, which is the focus of current fundraising, is unlikely to be delayed because the university has to wait until at least 2009 for state funding anyway. Bachmeier said he’s optimistic that the credit markets will begin flowing before that. But the university must start construction projects in the spring to ensure they are open by the inauguration of the academic year in August.

“If we can’t get approvals for a project in the next couple of months, if we can’t do it in that time period, we might as well wait a whole year,” he said.

The nonprofit Spectrum Health, which uses the Kent Hospital Finance Authority to issue tax-exempt bonds, refinanced a total of $537 million in bonds in two waves earlier this year, Freed said. He said variable bond interest rates spiked as high as 9 percent recently, but have since fallen back to the 5.5 percent range. Normally the rates run under 2 percent, he said.

“Usually they track very closely with where interest rates are running, so we know what to expect,” Freed said. “But this is a very, very, very unusual situation. It’s not every day that you see this much concern, panic — whatever word you want to use — in the investment community where people just don’t know what to put their money in. Well, you know that’s not going to last.”

The hospital system, which is Kent County’s largest employer, usually hedges the interest rates its pays on bonds by investing in the bond market itself and through derivatives, Freed said. So far, the spike in variable rates hasn’t caused any problems, he said.

“If it was to be long-term, which we wouldn’t expect, we’d probably have to refinance it again into something different,” Freed added. “But more realistically, it’s a short-term spike, so it adds to the costs of the organization. We would hope to some degree we could offset it somewhat by adding income. We would hope that our portfolios would earn more interest on our bond portfolios as well.”

He said the hospital system refinanced nearly all of its variable rate bonds in the spring due to problems in the bond insurance and the auction-rate securities market.

He said financing is already in place for the system’s major construction projects such as the $250 million Helen DeVos Children’s Hospital and a $98 million expansion and renovation at Blodgett Hospital in East Grand Rapids.

Metro Health Hospital in Wyoming had $30 million in variable rate debt as of last week, CFO Tim Susterich said. He said 18 percent of $165 million in outstanding debt is variable rate and saw interest rates hit 7 percent recently. “We hope it’s short-term,” he added.

He said bonds for the new hospital were sold two and a half years ago, and having just opened it a year ago, equipment needs are limited.

“In fact, we’re not looking to do anything else in addition or new debt in the near term,” Susterich said. “Where it is affecting us more is on the invest side. Everybody is feeling that pain.”

Springgate said the Kalamazoo Community Foundation bases the amount it spends on grant-making each year on the previous 20 quarters, so the downturn in the portfolio will have an impact for five years, she said.

“From an investment standpoint, we’re really focused on the long-term from that standpoint. The downturn in the market is probably not going to change the way our investment committee invests our assets. This is just blip in the long-term,” she said.

“On the short-term, it does have an effect on the foundation, on what we have to spend on operations and grants in the community. There’s going to be cutbacks in the short-term.”

Those cutbacks are likely to include trimming spending by not attending conferences and cutting back on technology purchases and marketing activities, although no final decisions have been made, Springgate said.

“Right now, we’re just staying the course,” added the Grand Rapids Community Foundation’s Black. “There’s not many places to hide these days.”

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