Denver School Board Defends Derivative Deal

Now a hot button issue courtesy of the times and the win by Bennet, heck they join Wisconsin, Harvard, and a host of other places in being burnt.

The $750 million issue of certificates of participation was designed to close a $400 million gap in the DPS pension fund. It became a political issue in the weeks before Tuesday’s primary election victory by U.S. Sen. Michael Bennet over former Colorado House Speaker Andrew Romanoff.

An Aug. 5 story on the front page of the New York Times said Bennet and current superintendent Thomas Boasberg, who was chief operating officer at the time of the deal, convinced the school board to approve an “exotic” financing scheme that included interest-rate swaps insured by Assured Guaranty Municipal Corp. with liquidity from Dexia Credit Local, which has since exited the market. Dexia Group was the fourth-largest letter-of-credit provider in 2008, a record year for variable-rate debt with volume of $120 billion.

According to the Times, the deal has backfired on the district, which has already paid $115 million in interest and other fees. That’s at least $25 million more than it originally anticipated.Interest rates that were projected at 5% spiked to 8.59%, according to the Times, and now average about 7.12%.

To escape its 30-year commitment in the deal, the district would have to pay termination fees of $81 million or about 19% of its $420 million payroll.The Times article said: “Denver has paid about $9.7 million more in fees for its deal than it would have had it chosen a simpler transaction.”

JPMorgan was senior manager with RBC Capital Markets as financial adviser. Bank of America and RBC were also counterparties on two of the swaps.

The Times article questioned the timing of the derivatives deal in the spring of 2008 after the auction-rate securities market collapsed. The district deal was similar to auction-rate securities in that rates reset weekly. However, the Denver school deal was designed as a synthetic fixed-rate with the counterparties swapping variable-to-fixed rates.With the DPS deal suddenly a hot-button issue, the district and its board last week issued letters and statements contradicting much of the Times story.

Boasberg and DPS Board president Nate Easley Jr. said the district saved $20 million by doing the deal, instead of doing nothing, in a letter to constituents.

“DPS has been able to increase spending in the classroom to better serve our kids,” Boasberg and Easley said. “That additional investment in our classrooms is a direct result of the savings from the pension financing.”

In a separate letter with other board members, Easley called the 2008 deal “far from exotic,” saying it was structured exactly like a 2005 transaction completed before Bennet or Boasberg joined DPS.

Chase and BOA, where have we seen them before? Of course lets not forget its Democrats attached at the hip to these deals.