Next month, the entity that runs Overture Center must start using its last reserves to cover payments on $27 million in debt with no clear way to stop the bleeding.

The nearly $300,000 in monthly payments brings new urgency to figuring out a new way to run Overture and handle its debt.

Since 2008, debt payments have chewed through an extra $5 million given by philanthropist W. Jerome Frautschi, who donated $205 million to build the facility.

The Madison Cultural Arts District, which runs Overture, is negotiating with banks on a refinancing plan that could involve forgiveness of part of the debt, but if the district's reserves are exhausted first, city taxpayers could be on the hook for $2 million to $3.2 million in 2011.

"We're at a crossroads," MCAD treasurer Dana Chabot said. "We can't continue to run the place the way we are now."

MCAD's debt shouldn't directly affect current Overture operations, where the 2009-10 season is unfolding, to be capped by a 32-day run of the Broadway hit "The Lion King" in the spring, Overture President Tom Carto said.

Overture began the first three months of its fiscal year, which started in July, with a $794,000 operating deficit. But the deficit was anticipated because Overture isn't heavily used that time of year. Because of staff cuts and program changes, the deficit is $140,000 less than projected.

MCAD is using money from advance ticket sales - mostly from "The Lion King" - to pay bills, so cash flow is sound, Carto said.

Still, for the first time, MCAD has an operating deficit without the reserves to cover it, Chabot said.

Deficit spending is worrisome because if ticket sales and other revenue don't meet projections, MCAD could end the fiscal year in the red with no clear way to balance the books, he said. MCAD previously used reserves to erase about $1.7 million in deficits between 2006 and the first six months of 2009.

An initial contingency plan calls for MCAD to reach out to the private 201 State Foundation, which has a $700,000 reserve, or post a deficit year. But the MCAD board wants staff to produce a better plan.

Overture is already working with more promoters, using the building for more non-theatrical events and tapping other revenues, Carto said.

The bleeding of reserves for debt is more troubling.

Frautschi donated enough money to build Overture. But initially, half his gift was put in a trust, with the rest coupled with a $115 million construction loan. The trust was to produce revenue for a reserve until debt was retired in 2036.

But the value of the trust declined, and in late 2005, the city approved a refinancing plan under which the trust was to cover debt payments and deliver $1.4 million annually to the reserve. If the trust couldn't make the payments, Frautschi, MCAD and the city promised to step in, making interest and small principal payments on a smaller, $27.7 million part of the loan through 2011.

Then the trust faltered, and in 2008 the banks forced a liquidation, making the other entities potentially responsible for the debt.

Frautschi's extra $5 million was exhausted this month, and MCAD, which has about $4 million in potential resources, will begin making payments in December.

The city could be liable for $2 million to $3.2 million starting in early 2011.

The situation has "depleted reserves that are absolutely necessary to continue operations," Chabot said. "Unless we change the way we're organized, we'll go out of business."

But Carto said Overture is aggressively seeking to address the problem in negotiations with the bank.

"We haven't been sitting on our hands," he said. "There's a lot of movement going on behind the scenes. There are a lot of people at the table. I think everyone at the table wants to see a solution."

Carto declined to share details or say when a refinancing may be finalized. "All of this is tied together. We hope the solution will come sooner rather than later," he said.

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