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Chicago Art Institute Borrows $100 Million for Pensions

The Art Institute of Chicago, the home of paintings by Henri Matisse and Pablo Picasso, is selling about $100 million of taxable and tax-exempt bonds partly to shore up unfunded pension obligations.

The institute, founded in 1879, features 300,000 works in its permanent collection. It plans to issue about $61 million of tax-exempt debt as soon as this week through the Illinois Finance Authority and $40 million of taxable bonds itself, according to offering documents. The securities mature from 2013 to 2040. The sales will be led by Morgan Stanley.

The institute joins municipalities across the U.S. -- including Chicago and Illinois -- that are struggling to cope with growing retiree benefit costs. Funding for state retirement plans fell for a fourth straight year in 2011 to 71.7 percent, according to data compiled by Bloomberg, as insufficient contributions and inadequate investment gains overcame cuts by more than 40 legislatures to benefits since 2007.

With interest rates in the $3.7 trillion muni market near their lowest level since the 1960s, “the current low-yield environment presents a very favorable opportunity for the Institute to refinance its debt and to re-examine its capital structure,” Erin Hogan, director of public affairs at the museum, said in an e-mail. “We are hoping for strong demand for the bonds.”

Illinois has borrowed $7.2 billion since 2010 for pension benefits, according to Bloomberg data. The worst-funded state retirement system has only 43.4 percent of assets needed to cover promised obligations.

Pension Burden

Moody’s Investors Service said in an Oct. 5 report that pension expenditures are expected “to continue to rise for the majority of local governments, despite a variety of approaches to trying to contain these costs.”

The Art Institute is rated A1 by Moody’s, its fifth-highest grade, in part reflecting the museum’s pension and retirement liabilities. The benefits totaled $64.5 million in the 2012 fiscal year, according to the Moody’s report.

Proceeds of the museum’s taxable bond sale will be used “without limitation” to pay for “accelerating funding to the Institute’s unfunded pension-benefit obligations,” Hogan said. The retirement plan had enough assets to meet about 65 percent of obligations to employees as of June 30, 2011, up from 53 percent the year before, Bloomberg data show.

The museum employed about 1,030 full- and 573 part-time workers as of June 30 this year, according to offering documents. None is represented by unions.

Demand Rising

As U.S. interest rates have neared record lows, municipal-bond investors have shown demand for lower-rated debt similar to the Chicago museum’s securities this year. The difference between taxable single-A rated obligations and top-grade munis narrowed to 1.58 percentage points in April, the smallest since 2008. The current spread is 1.7 percentage points, Bloomberg data show.

The museum completed its Modern Wing in 2009, with works from Matisse, Picasso and Salvador Dali. The section’s operating expenses reduced the institute’s credit strength, according to Standard & Poor’s.

Still, it completed a $375 million campaign for the wing in 2011, and more than $322 million of cash pledges have been collected, S&P said in a July report. The New York-based company rates the museum A+, fifth-best.

The Illinois Finance Authority, a so-called conduit issuer, last sold bonds on behalf of the museum two years ago, Bloomberg data show. The debt maturing in 2040 was priced to yield 4.93 percent in May 2010.

Editors: William Glasgall, Mark Schoifet.

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