G
etting ready to write about the future of Lyric Opera a couple of weeks
ago, I was scrolling through its latest annual report when three words
caught my eye: interest-rate swaps. The swaps are a financial management
strategy that was popular among governments and nonprofits in the early
years of this century. But for the last decade they’ve looked like a costly
folly.
Here’s how it works: The bond borrower agrees to pay the opposite party in
the swap, usually a bank, a flat rate of interest (along with a fee for
entering into the agreement). The bank, in turn, will pay the bond borrower
the fluctuating, variable rate of interest.
But Lyric is hardly alone in this. A look at financial statements from a
few randomly selected cultural organizations suggests that it’s the rule
for our major institutions, not the exception. The Chicago Symphony
Orchestra, for example, spent $2.8 million on swaps in 2017, and $3 million
on them the year before. Interest payments on its bonds for the same years
were only $950,000 and $135,000 respectively.
But Carl F. Luft, academic director of DePaul University’s Arditti Center
for Risk Management, says the people who bought the swaps were making “a
hedging decision,” like buying insurance for your car: “What they were
doing was eliminating the need to worry about rising interest rates.”
