The Los Angeles County Museum of Art came under fire recently because it decided to halt its weekend film program, which the museum said was losing money and an audience.

However, the film program isn’t the only financial bump the museum has hit. LACMA has been paying much higher interest rates on much of its debt as a result of the financial crisis last year.

LACMA sold $383 million worth of bonds to bankroll the expansion of its Miracle Mile campus, including the 18-month old Broad Contemporary Art Museum, the under-construction Lynda and Stewart Resnick Exhibition Pavilion and the planned renovation of LACMA West.

Of its bonds, $200 million worth which was brought to market in late 2007 as the mortgage crisis hit was insured by Financial Guaranty Insurance Co. The New York insurer lost its AAA rating in January 2008 due to its exposure to subprime loans, and that sent LACMA’s interest rates skyrocketing.

As a result, the museum quietly sued FGIC in L.A. federal court in November, claiming the company misrepresented its vulnerability to the subprime market.

LACMA is seeking to recover about $32 million in damages, and in court documents filed late last month, the museum estimates it expects to rack up about $22 million in increased interest rates and fees over the 25-year life of the bonds.

A LACMA representative and the museum’s lawyers declined to comment for this article, citing the pending litigation. An attorney for FGIC did not return requests for comment.

Industry experts said LACMA’s battle with FGIC exemplifies the interest rate escalation non-profits and municipalities face because bond insurers were hit by mortgage losses.

“One of the trigger points of things starting to come unglued is the insurer gets downgraded,’ said Marilyn Cohen, chief executive of West L.A. bond portfolio manager Envision Capital Management Inc. “That’s why many of these fixed-rate municipal bonds have had tremendous problems.”

In the lawsuit, LACMA claims it was forced to refinance the $200 million in bonds in September in order to push its rates down. The museum saw interest rates peak at 11 percent around February of last year, up from between 3 percent and 4 percent.

According to the official statement that LACMA filed when it refinanced the bonds, the museum will be paying $12.8 million in interest for the period ending Dec. 1 of this year.

The museum’s budget for the new fiscal year is $53 million, down $7 million from the previous term.

When LACMA Chief Executive Michael Govan announced plans to halt the film program and revamp it, he acknowledged that the museum is scaling back expenses.

Bad timing

LACMA’s expansion plans began in 2003, when L.A. billionaire Eli Broad gave $50 million for the Broad building. The museum then issued $119 million in bonds for additional funding for the project in 2004.

LACMA executives then sought a second round of financing in November 2007 for the continued modernization of the museum, and issued an additional $200 million in bonds.

However, before LACMA was set to close the $200 million bond sale, Fitch Ratings announced that it was reviewing FGIC’s credit standing, and warned that could result in a downgrade of its AAA rating. As an insurer, FGIC would have to make good on bond payments that LACMA could not pay, and any downgrade would increase the risk of nonpayment to bondholders, thereby forcing up interest rates.

LACMA executives called on FGIC and one of its directors to make sure that the insurer would maintain its AAA rating. In court documents, museum executives claim that FGIC said it “would do whatever was required to maintain its Triple A rating, and that (it) was highly motivated to retain its Triple A rating because of its ability to write municipal bond insurance policies depended on its having a Triple A rating.”

LACMA claims it went forward with the transaction because of FGIC’s reassurances, and paid the insurer a $6.75 million premium.

But Fitch and Standard & Poor’s downgraded FGIC from a AAA rating to an AA rating in January, and then Standard & Poor’s lowered the insurer’s rating again in March to BB. FGIC is currently unrated.

Money manager Cohen pointed out that FGIC doesn’t have control over third-party raters like Fitch or Standard & Poor’s.

“LACMA took the risk,” Cohen said. “This is a big boy’s game.”

As a result, the interest rates on the bonds jumped to 7 percent and peaked at 11 percent. LACMA officials went to Los Angeles County for help to stop the bleeding.

“When the market went away, then their bank ended up buying the bonds as the purchaser of last resort at a high interest,” said Mark Saladino, the county’s treasurer and tax collector. “And (LACMA) saw its weekly interest rate go from 1.5 to 7 percent, or more, very quickly. That was costing them a lot of money in interest.”

Saladino said the county provided LACMA with some breathing room by buying up the bonds, thereby helping to bring down the rates, until the museum could refinance them.

LACMA refinanced its 2004 and 2007 bonds which by then had grown to $383 million in September and removed FGIC as its insurer. According to the museum’s official statement, it expects to pay $12.8 million in interest in 2009 and $13.7 million in interest in 2010.

But while LACMA is scaling back its budget amid the weak economy, construction on the 45,000-square foot Resnick building for temporary exhibits is on track and is scheduled to open next year.

Meanwhile, LACMA’s plan to place the museum’s film program on hiatus has taken center stage.

“The amount the film program costs when you look at other expenses that LACMA has engaged in are pretty insignificant,” said Kathleen Dunleavy, a senior public relations manager for Sprint in Southern California. Dunleavy and L.A. art writer Debra Levine are spearheading Save Film at LACMA, which has launched a petition to restore the movie program.

“These are tough times, people are struggling, and this program represents a spiritual community of people who could be immersed in the beauty of the art of film,” said Levine. “It’s a tremendous faux pas by our art director, and I’m really watching carefully to see how he will reach out and heal this blunder.”