The Arkansas Arts Center has started the process to receive tens of millions in taxpayer-approved bond proceeds for the overhaul of its Little Rock museum, after months of hand-wringing over timing.
In making the decision to sell the bonds this year, officials balanced an expectation that federal interest rates will rise — potentially cutting into how much money is available for the expansion — with reluctance to start a three-year clock to spend most of the proceeds on a project more than four years away from completion, museum Director Todd Herman said.
A mixture of the $37.2 million bond package and some $50 million in private contributions will cover the expansion’s cost and increase the museum’s endowment to an appropriate size, Herman has said. The project’s estimated $46 million price tag covers only “hard” expenses, meaning the actual cost when including architects’ and consultants’ fees will be higher.
The Arts Center has asked the city of Little Rock to request qualifications from bond attorneys, Herman said. Once an attorney is retained, the Arts Center could sell the bonds within three months, he said.
An Internal Revenue Service rule says public bodies must “reasonably expect” to spend 85 percent of bond proceeds within three years of the sale. At the current pace, that deadline would roughly line up to late 2020, or about one year into the project’s expected 18-month construction phase and more than a year before the facility reopens.
“We wanted to make sure we were far enough along in the project to ensure we’re meeting that [three-year] threshold,” Herman said. “We feel we’re safely there now.”
The Arts Center — which has retained an architectural team, engineers and consultants — has begun racking up costs on the project but has not yet spent public money. Instead, the museum’s nonprofit foundation, which owns the museum’s artwork and controls its endowment, is covering the bills.
Robert Tucker, chairman of the foundation’s board of directors, said the nonprofit expects to be fully reimbursed for those payments.
“If we have to take money out of the foundation to pay bills, we’re going to reimburse the foundation,” Tucker said.
Tucker said he wasn’t sure how much the foundation has spent thus far and referred that question to Herman. Herman did not directly answer an emailed question or a follow-up question.
“The expenses to date are primarily for architects and consultants as part of the discovery phase of the project,” Herman said. “These have been paid by the foundation. The bonds have not been sold. As soon as the public money becomes available, a mechanism will be put in place for regular reporting to the city of how that money is being spent.”
Voters granted the Arts Center authority to sell the bonds in an election held 15 months ago. A 2 percent tax increase on hotel stays will pay down the debt. Because of the project’s long-term nature, the museum postponed selling the bonds.
Herman would not say whether the museum’s intention is to sell the entire bond package at one time or break it into segments, an idea board President J. Shepherd Russell previously discussed.
At a March meeting of the Arts Center’s executive committee, Russell, who is a bond attorney, said the target for selling the package in full was 2019, though he mentioned then that officials were “cognizant” of rising interest rates.
Russell, who did not attend last week’s meeting of trustees, did not respond to messages seeking comment.
The Federal Reserve in March raised its benchmark interest rate for the second time in three months. The rate dropped during the recession and national financial crisis, and has been raised only once — in late 2015 — before the two bumps in quick succession. The New York Times reported Wednesday that policymakers have not indicated whether they will increase the rate again when they meet in June.
Dee Wisor, a bond attorney from Denver with the firm Butler Snow, said his municipal-bond clients are grappling with the same question — accelerate the project or bond sale to meet that timeline or risk a higher interest rate.
“I’ve had clients go through the same drill,” Wisor said. “The concern about rising interest rates is a legitimate concern.”
Wisor said it’s tough to predict how much money the Arts Center would lose with a higher interest rate over the course of the 30-year repayment period voters authorized.
Tucker, the foundation chairman, said it’s been his expectation that the Arts Center would sell the bonds this year, and said the foundation did not request that the museum’s public board of trustees sell the bonds at a specific time.
“That’s just the way things have become scheduled,” he said.
Herman said officials used their estimated project timeline to determine whether they would meet the deadline.
A conceptual design should be finished by this fall, and construction is expected to start around December 2019, Herman said. The upgrade isn’t expected to be complete until early 2022.
Tucker said $20 million of the capital campaign’s $50 million goal will go to the foundation. The remainder, or a target of $30 million, would go to the project, he said. Tucker said he expects to have raised 75 percent of that goal, or about $37.5 million, by Labor Day.
The foundation will control the private contributions set aside for the project, Herman said.
The Arts Center continues negotiating a contract with the primary architect selected for the project, Chicago- and New York-based Studio Gang. In the meantime, the Arts Center is paying the firm up to $1,600 a day through a letter of intent signed by both parties. These fees will be deducted from the ultimate contract total, Herman has said.
Studio Gang is working with the Little Rock firm Polk Stanley Wilcox to map out the upgrade. Herman said the museum also has hired a landscape architect, civil engineer, structural engineer, a cost estimator and consultants with various expertise such as plumbing, fire protection and sound.