Denver dad and former school board candidate Christopher Scott questions the financial management of Denver Public Schools as the district asks voters to approve the largest bond in its history.
Last week, the Denver Business Journal quoted Lynn Turner as saying, “DPS gambled with taxpayers’ money when they decided to enter into interest-rate swaps – and they lost. To date, that gamble has taken a lot of money out of the classroom that would have otherwise benefited students. And instead, money has gone into the pockets of bankers.”
Turner was talking about the hotly-contested transaction Denver Public Schools entered into in April 2008. The transaction has cost Denver taxpayers $214 million in interest and fees alone. It has cost over $100 million in transaction closing costs. And to get out of the debt, it could cost over $50 million.
If you doubt these facts, read on.
DPS’s 2008 pension funding transaction was designed for two purposes:
- To refinance $300 million in debt the district was carrying in 2008.
- To fully fund DPS teachers’ pension, which had a $400 million shortfall resulting from the stock market crash in 2001 and several decisions made by DPS related to early retirements for teachers.
Why do we care what Lynn Turner says? Well, primarily because he was chief accountant at the U.S. Securities Exchange Commission and secondarily because he is on the board of directors of Colorado Public Employees’ Retirement Association, or PERA. PERA is the state employees retirement system, into which DPS’s pension was merged in 2010.
It’s not like Turner was treading new ground with his statements. The story of DPS’ 2008 transaction has been covered by a host of news agencies, including: The Denver Post, The New York Times, EdNews Colorado, The Bond Buyer and the Denver Business Journal. (Readers should note that both EdNews and the Denver Business Journal have written multiple stories on this issue, as has The Bond Buyer.)
Further, the 2008 transaction has been the subject of testimony given before the SEC and a case study at the 2011 Financial Management Association annual meeting held in Denver.
Complicated terms don’t mask facts
To wade through all of these stories is to take a plunge down the public finance rabbit hole. The stories are fraught with terms like “derivatives,” the “London Interbank Offered Rate” or “LIBOR,” “swap rates,” “counterparties,” “CAFRs,” “unfunded liabilities,” “normal cost,” “present value” and such, ad nauseum. But remove all the terms of art and finance and we know a lot about the outcomes of DPS’s 2008 transaction and its refinance in 2011. We know that:
- DPS took a loan for $750 million in 2008, $50 million of what was the equivalent of closing costs.
- Through 2011, when the debt was refinanced, DPS had paid $152 million in interest and fees but did not pay off any of the debt itself.
- DPS was forced to refinance the debt in 2011 because of conditions of the loan it took out and that the district paid another $50 million in closing costs, which it wrapped back into the debt.
- Since April 2011 DPS has paid $62 million in fees and interest. Again, the debt has not been paid down at all.
After four years, what do the taxpayers of Denver owe for the 2008 transaction? Over $800 million, or $50 million more than they owed when DPS took on the debt.
We also know a couple of other things that should be considered about this debt. DPS will have to again refinance the debt in 2014 as part of conditions set forth in the type of loan it took.
And last but not least DPS worked a deal with the Colorado legislature to allow the district to deduct from its pension contributions 8.5 percent of the total debt owed.
That brings us back to Lynn Turner.
As a director on PERA’s board, Turner has a responsibility for caring for Colorado’s pension system. As part of that responsibility, Turner is aware that the Colorado legislature has required PERA to be fully funded by 2040. Yet each year DPS does not pay roughly 75 percent of its statutory obligation to the pension system. The teachers continue to make their required contributions.
As a result of this defunding, DPS has rebuilt its debt to the pension to $637 million, which is accruing interest at an 8 percent interest rate. This happened in just four years. Yet DPS justified taking on the 2008 debt by saying the interest rate it was paying for its pension debt was too great.
Pension funding levels dangerously low?
In her most recent article for the Denver Business Journal, which has been republished on EdNews, reporter Heather Draper quotes Turner as saying the legislation allowing DPS to take these deductions is ensuring “…the funding levels of the [DPS] pension would fall precipitously to very low and dangerous levels.”
Why does Turner say this? When DPS Superintendent Tom Boasberg talks about the district’s deductions, he frequently says the credit DPS gets on its contributions is meant to bring DPS in line with the PERA School Division in terms of its unfunded liabilities.
This means when the DPS pension, which was funded at 100 percent in 2008, reaches the same level of funding as the Colorado School Division of PERA, which is currently funded at 60 percent, Boasberg will have reached his goal.
According to John MacPherson, the former interim executive director of the DPS Retirement System, DPS has not reduced the cash flow requirements for its pension debt. In fact, by regrowing the debt, DPS is now accumulating greater debt at a rate faster than it was prior to 2008. MacPherson told me, “Off the top of my head, DPS was accruing debt at $34 million per year on its $400 million liability in 2008. Now it is accruing debt at about $50 million per year.”
In the latest version of the Denver Plan, DPS states that one of its strategies for improving the district’s performance is the “strategic management of resources.” One could argue that the 2008 pension financing transaction amounts to a debt management strategy, but as MacPherson likes to ask, is it ethical?
When all is said and done, the facts of this case are as follows:
- In all, DPS has paid a total of $214 million in fees and interest on its 2008 loan, according to a spreadsheet provided to the school board by Chief Financial Officer David Hart.
- DPS has rolled $100 million in closing fees into its loans, according to PCOPs certificate offering documents. (The 2008 transaction had $37.3 million in closing costs and the 2011 transaction had $65.3 million, for a total of $102.6 million in “closing costs.”)
- DPS will have to refinance the debt again in 2014, according to 2011 certificate offering documents.
- Over the course of 30 years, Denver taxpayers will have paid over $1.9 billion dollars on this debt, The source of 90% of this information is based on the schedule of payments (rentals) contained in the Series A and B PCOPs from the 2011 offering documents.
On the pension front, the facts of the case are these:
- DPS paid off its entire pension liability as of Jan. 1, 2008. At that time, the pension was entirely funded, according to DPS’s 2008 comprehensive annual financial report, of CAFR.
- As of the end of 2011, DPS has regrown its pension liability to $637 million, which is being charged an 8 percent interest rate, according to the 2011 PERA CAFR.
- DPS continues to short its employer contributions to the pension system by 75 percent, also according to the PERA 2011 CAFR.
- DPS plans to continue shorting its contributions until its pension reaches the same funding level as the Colorado School Division of PERA, which is currently at 60 percent, according to Senate Bill-282, passed in 2009.
These are the facts. They are undisputed.
I cannot tell you how to feel about this when DPS asks you to give the district more money. I, too, want all of our children to receive a top-notch education. However, I also want to see district resources managed strategically, as is suggested in the Denver Plan.
So when DPS asks me for another $466 million I worry how that money will be managed given DPS’s past performance. Will it be spent wisely to benefit the greatest number of children? I just don’t know.
Note: If you want the primary source documentation, send me an email at cscottrun4it@gmail.com.
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