Use of Tax-Exempt Bonds on Rise at Non-Profit Groups, Report Says

Foundations, museums, and other non-profit institutions are increasingly using tax-exempt bonds to finance major capital improvements, according to a new report by Standard & Poor’s.

The reason: Organizations with a strong financial base (and therefore eligible for favorable bond ratings, which translate into lower interest rates) often find it cheaper to borrow money than to spend their endowment. Investments often earn more than 15 per cent a year, the report says, while tax-exempt borrowing may cost the organizations less than 6 per cent annually.

Among recent examples:

* Cold Spring Harbor Laboratory, on Long Island, N.Y., this year issued $42-million in revenue bonds to acquire a building, finance capital improvements, and refinance outstanding debt.

* The Mount Vernon Estate & Gardens, in Virginia, sold $9.2-million in bonds last year to expand its gift shop and restaurant, build an auditorium, and undertake other projects.

* The Rockefeller Foundation, in New York, and the Ewing Marion Kauffman Foundation, in Kansas City, Mo., have issued bonds to finance their new headquarters.

* The David and Lucile Packard Foundation, in Los Altos, Cal., has guaranteed the debt of the YMCA of Santa Clara Valley, which allowed that charity to obtain a higher bond rating (and lower interest rate) than it could have received on its own.

Non-profit hospitals and academic institutions have long issued bonds to finance their growth, the report notes, but foundations, cultural institutions, and other types of non-profit groups are newer to the capital markets.

Free copies of the report, “Viewpoint on Nontraditional Nonprofits” are available from Deborah Malak, Public-Finance Department, Standard & Poor’s, 55 Water Street, New York 10041; (212) 438-2055.