Analysis: Both sides right in DPS pension debate

Education News Colorado asked an experienced financial journalist to take a look at recent questions raised about Denver Public Schools’ pension refinancing. Here’s his take:

To a group of dissident school board members and their allies, a DPS financial transaction entered into just two years ago has become a costly and complex trap, costing the district millions of dollars when things went wrong.

To Superintendent Tom Boasberg, the transaction has already accomplished its main goals and has saved DPS from putting millions of dollars each year into its pension plan.

They are both correct.

At issue is a series of financial decisions made by former Superintendent Michael Bennet and Boasberg, then DPS’ chief operating officer, in early 2008. The transaction they chose, and the DPS board unanimously approved, included an interest-rate “swap” that ultimately cost the district unbudgeted millions in the 2008-2009 school year.

Now, some DPS board members, including two who voted yes on the transaction, have been publicly agitating to find out more about the costs of the deal and whether it makes sense for the district to continue.

Seeking a PERA merger

In early 2008, Bennet and Boasberg were eager to get DPS out from under an ever-increasing series of payments to prop up the Denver Public Schools Retirement System, also known as DPS-RS. The ultimate goal was a merger with Colorado PERA, the state pension system that serves school employees in every other district besides DPS.

At the time, DPS estimated its pension fund had a shortfall of roughly $400 million. If DPS intended to chip away at that unfunded liability, it would need to jack up its annual out-of-pocket costs to the pension fund by millions of dollars. And, previous merger negotiations with PERA had stumbled as the two sides wrestled with issues of how to combine two under-funded plans.

After an aborted attempt to borrow against the pension plan’s assets, Bennet and Boasberg decided on a more traditional financing plan: DPS would put up some of its school buildings as collateral and issue $750 million in Pension Certificates of Participation, or PCOPs.

Certificates of participation entitle the holders to a certain dedicated stream of payments; in this way, they’re different from a general-obligation bond. In DPS’ case, the school district will make rental payments for the use of the schools backed by the PCOPs, and the PCOP holders get the payments.

Denver Superintendent Tom Boasberg

The proceeds would be used to inject $400 million into the pension plan, plus pay off about $265 million in previously-issued pension-related debt. The rest would go to the cost of issuing the new debt – about $29 million – plus various reserve funds that were required as a condition of the bonds.

Making a 30-year deal

Given DPS’ desire to defer its pension costs and find more money in the near term for classroom instruction, it didn’t make sense to do a short-term borrowing, where DPS would need to refinance nearly the entire principal a few years down the road.

So DPS looked to a long-term maturity: 30 years. Here, however, is where Bennet and Boasberg made a decision about interest rates that went substantially wrong in the short term.

In an April 6 interview, Boasberg said DPS could have paid somewhere around 7 percent to 7.25 percent if it had issued fixed-rate debt for the life of the borrowing. Or, it could shave off around 1.5 to 1.75 percentage points from its interest rate by issuing a specialized series of notes that went to auction on a weekly basis at market rates.

A fixed rate over the life of the debt compensates the lender for the risk DPS might default. By chopping the debt into a series of very short-term notes, Boasberg said, DPS saved the extra interest it needed to pay to compensate lenders for credit risk. “We made the decision we were willing to take the risk on our own credit,” he said.

However, says Boasberg, it would have been “extraordinarily irresponsible” to let the interest rate float for the full 30 years of the debt: “For a public entity to be at the risk of fluctuations in interest rates is absolute folly. To suggest we’d be better off running the risks of the vagaries of the market is foolish.”

So DPS entered into what’s known colloquially as an “interest rate swap,” where two parties swap their obligations to make interest-rate payments.

Overlapping a flailing market

DPS agreed to pay 4.859 percent annual interest on the $750 million in principal to a consortium of investment banks. That’s roughly $36 million per year.

The banks pay DPS a floating interest-rate payment equal to what’s called one-month LIBOR, or the London Inter-Bank Offered Rate. LIBOR is one of the select worldwide interest rates that are used as the basis of any number of bank agreements and transactions.

DPS then planned to pay the investors whatever amount above LIBOR the bonds sold for each week. DPS expected, and budgeted, to pay 0.1 percent to 0.25 percent above LIBOR. That would have been about $2 million to $3 million for the 2008-2009 school year, which began July 1.

That school year overlapped almost perfectly with one of the worst financial markets of the last century, a crisis that threatened to pull every one of America’s major investment banks into bankruptcy. Stock markets spiraled downward. Credit froze to an unprecedented extent as corporate bonds spiked and a money-market mutual fund “broke the buck” by slipping below $1.

And supposedly safe short-term corporate borrowings called “auction-rate securities” suddenly became illiquid and completely unsalable on the open market.

Confronting a worst-case scenario

It was the worst-case scenario for DPS since its PCOPs were similar to auction-rate securities and were supposed to go to market every single week. The good news was that there was a provision in the DPS debt agreements that solved the problem. The bad news was that it was extraordinarily expensive.

DPS had a European bank named Dexia that agreed to be the “liquidity provider” and buy the district’s debt any time the auction failed. The auctions failed consistently in 2008, and Dexia bought the bonds at a penalty rate of 9 percent.

Instead of paying just 0.1 percent to 0.25 percent over LIBOR, DPS ended up spending from 4.64 percent to 8.59 percent above LIBOR during that period, district spokesman Michael Vaughn said.

And instead of paying $2 million to $3 million in interest costs over the course of the 2008-09 school year, as both anticipated and budgeted, DPS paid $24.3 million, according to a spreadsheet prepared by DPS financial staff.

That’s on top of the $36 million in fixed interest-rate payments to the investment banks. Add in other fees to Dexia and its investment banks, and DPS paid $64.4 million in the 2008-09 school year.

What makes the transaction look even worse with the benefit of hindsight is that interest rates fell, not rose, after the deal.

Had DPS not entered the swap, run the risks of the vagaries of the market and managed to pay a rate based on LIBOR plus 0.25 percent more, they’d likely have paid in the range of $12 million for the school year, rather than the $36 million in fixed-rate interest. That’s because one-month LIBOR sank below 1 percent for the second half of the school year.

Understanding the district’s perspective

To Boasberg, the $64.4 million DPS paid is still about break-even. Understanding his thinking is key to evaluating his argument that the borrowing and swap deal is now saving the district millions of dollars a year.

When Boasberg looks at DPS’ costs on the new debt issue, he compares them to both the old debt the district paid off and the unfunded liability in the pension.

He looks at what was a nearly $400 million shortfall in the pension plan, and notes the pension assumed an 8.5 percent annual return on its investments. In Boasberg’s mind, not having the $400 million at work earning 8.5 percent is no different from taking out a $400 million loan at 8.5 percent interest. And that’s $34 million in interest costs a year.

Add it to the roughly $30 million in annual payments on the previous round of debt, and DPS would have faced more than $60 million in annual costs without the April 2008 refinancing, Boasberg argues.

So the $64.4 million paid in 2008-09 in one of the worst markets since the Great Depression is about a wash, from his perspective.

Seeing it a different way

The school board members who are now asking questions haven’t embraced that calculus.

School Board Member Jeanne Kaplan, right, and Board Member Mary Seawell at a recent DPS meeting.

They’re looking at the real, out-of-pocket costs of more than $115 million and comparing them to interest on just the old outstanding debt – which they estimate at around $50 million to $60 million. They’re not factoring in that $34 million annual cost to the under-funded pension because DPS wasn’t paying it out in real dollars.

And in their eyes, that means DPS has lost upward of $60 million on this financing transaction.

The crux of any disagreement going forward, then, will be what price to place on that under-funded pension.

It’s “incredibly important,” Boasberg said, to remember the purposes of the transaction: Save tens of millions of dollars to put into the classroom; fully fund the pension to accommodate the PERA merger; and fully fund the pension for the retirement security of DPS employees. “The financing has been very, very successful on all three fronts,” he said.

Board member Jeanne Kaplan, who voted for the deal in 2008, now says she didn’t understand the downside risks and wants an accounting that will help her understand what went wrong. If DPS has a successful swap, she says, it needs to tell the world what it did right.

School board member Andrea Merida, who is also asking questions but who was not on the board at the time, is less sure. “I think you guys were sold a bill of goods,” she said to Kaplan in a recent interview.

Looking ahead over a longer term

Now, in the 2009-2010 school year, the weekly auctions of DPS debt are returning to normal and the district has paid just under $3 million on its swap in the first nine months – well under budget and well under the $24.3 million of the prior year.

DPS projects financing costs of $45.5 million this year – compared with $62.3 million of payments on prior debt and the annual cost of the pension obligation.

If DPS continues to sell its debt securities successfully, its annual costs should settle in at those levels going forward.

With 28 more years to go, there’s a great chance interest rates will rise to make DPS’ fixed rate of 4.895 percent look much more palatable. While LIBOR has fallen to 1 percent or less in times of recession and low interest rates, it’s also easily topped 5 percent and 6 percent in times of economic expansion – to say nothing of what happened in the sky-high interest rate environment of the late 1970s and early 1980s.

All of which is good, since DPS estimates it would need to pay $48 million to its investment-bank partners to terminate the swap.

There are two caveats to the good news, however.

While the financing math works now, the PCOP repayment schedule is back-loaded so that most of the principal payments come in the final 10 years of the debt. By 2025, DPS will owe nearly $60 million per year, and by 2038, the payment will top out around $70 million.

Secondly, DPS raised the money for the pension fund immediately before a steep drop in the markets. The DPS division of PERA is no longer fully funded but audited numbers as to where it stood at year-end 2009 are not yet available. And its long-term funding problem, along with PERA’s, remains unsolved.

Both problems may end up making last year’s rate-swap problem look like small potatoes.

David Milstead wrote about corporate finance at the Rocky Mountain News for eight years until it closed in February 2009. He previously worked at the Wall Street Journal, among other publications. He now writes for the Report On Business section of The Globe and Mail, Canada’s national newspaper. He passed the Level I exam in the Chartered Financial Analyst program in December 2007.

call out

Our readers had a lot to say in 2017. Make your voice heard in 2018.

PHOTO: Chris Hill/Whitney Achievement School
Teacher Carl Schneider walks children home in 2015 as part of the after-school walking program at Whitney Achievement Elementary School in Memphis. This photograph went viral and inspired a First Person reflection from Schneider in 2017.

Last year, some of our most popular pieces came from readers who told their stories in a series that we call First Person.

For instance, Carl Schneider wrote about the 2015 viral photograph that showed him walking his students home from school in a low-income neighborhood of Memphis. His perspective on what got lost in the shuffle continues to draw thousands of readers.

First Person is also a platform to influence policy. Recent high school graduate Anisah Karim described the pressure she felt to apply to 100 colleges in the quest for millions of dollars in scholarships. Because of her piece, the school board in Memphis is reviewing the so-called “million-dollar scholar” culture at some high schools.

Do you have a story to tell or a point to make? In 2018, we want to give an even greater voice to students, parents, teachers, administrators, advocates and others who are trying to improve public education in Tennessee. We’re looking for essays of 500 to 750 words grounded in personal experience.

Whether your piece is finished or you just have an idea to discuss, drop a line to Community Editor Caroline Bauman at

But first, check out these top First Person pieces from Tennesseans in 2017:

My high school told me to apply to 100 colleges — and I almost lost myself in the process

“A counselor never tried to determine what the absolute best school for me would be. I wasted a lot of time, money and resources trying to figure that out. And I almost lost myself in the process.” —Anisah Karim     

Why I’m not anxious about where my kids go to school — but do worry about the segregation that surrounds us

“In fact, it will be a good thing for my boys to learn alongside children who are different from them in many ways — that is one advantage they will have that I did not, attending parochial schools in a lily-white suburb.” —Mary Jo Cramb

I covered Tennessee’s ed beat for Chalkbeat. Here’s what I learned.

“Apathy is often cited as a major problem facing education. That’s not the case in Tennessee.” —Grace Tatter

I went viral for walking my students home from school in Memphis. Here’s what got lost in the shuffle.

“When #blacklivesmatter is a controversial statement; when our black male students have a one in three chance of facing jail time; when kids in Memphis raised in the bottom fifth of the socioeconomic bracket have a 2.6 percent chance of climbing to the top fifth — our walking students home does not fix that, either.” —Carl Schneider

I think traditional public schools are the backbone of democracy. My child attends a charter school. Let’s talk.

“It was a complicated choice to make. The dialogue around school choice in Nashville, though, doesn’t often include much nuance — or many voices of parents like me.” —Aidan Hoyal

I grew up near Charlottesville and got a misleading education about Civil War history. Students deserve better.

“In my classroom discussions, the impetus for the Civil War was resigned to a debate over the balance of power between federal and state governments. Slavery was taught as a footnote to the cause of the war.” —Laura Faith Kebede

Weekend Reads

Need classroom decor inspiration? These educators have got you covered.

This school year, students will spend about 1,000 hours in school —making their classrooms a huge part of their learning experience.

We’re recognizing educators who’ve poured on the pizazz to make students feel welcome. From a 9th-grade “forensics lab” decked out in caution tape to a classroom stage complete with lights to get first graders pumped about public speaking, these crafty teachers have gone above and beyond to create great spaces.

Got a classroom of your own to show off? Know someone that should be on this list? Let us know!

Jaclyn Flores, First Grade Dual Language, Rochester, New York
“Having a classroom that is bright, cheerful, organized and inviting allows my students to feel pride in their classroom as well as feel welcome. My students look forward to standing on the stage to share or sitting on special chairs to dive into their learning. This space is a safe place for my students and we take pride in what it has become.”

Jasmine, Pre-K, Las Vegas, Nevada
“My classroom environment helps my students because providing calming colors and a home-like space makes them feel more comfortable in the classroom and ready to learn as first-time students!”


Oneika Osborne, 10th Grade Reading, Miami Southridge Senior High School, Miami, Florida
“My classroom environment invites all of my students to constantly be in a state of celebration and self-empowerment at all points of the learning process. With inspirational quotes, culturally relevant images, and an explosion of color, my classroom sets the tone for the day every single day as soon as we walk in. It is one of optimism, power, and of course glitter.”

Kristen Poindexter, Kindergarten, Spring Mill Elementary School, Indianapolis, Indiana
“I try very hard to make my classroom a place where memorable experiences happen. I use songs, finger plays, movement, and interactive activities to help cement concepts in their minds. It makes my teacher heart so happy when past students walk by my classroom and start their sentence with, “Remember when we…?”. We recently transformed our classroom into a Mad Science Lab where we investigated more about our 5 Senses.”


Brittany, 9th Grade Biology, Dallas, Texas
“I love my classroom environment because I teach Biology, it’s easy to relate every topic back to Forensics and real-life investigations! Mystery always gets the students going!”


Ms. Heaton, First Grade, Westampton, New Jersey
“As an educator, it is my goal to create a classroom environment that is positive and welcoming for students. I wanted to create a learning environment where students feel comfortable and in return stimulates student learning. A classroom is a second home for students so I wanted to ensure that the space was bright, friendly, and organized for the students to be able to use each and every day.”

D’Essence Grant, 8th Grade ELA, KIPP Houston, Houston, Texas
“Intentionally decorating my classroom was my first act of showing my students I care about them. I pride myself on building relationships with my students and them knowing I care about them inside and outside of the classroom. Taking the time to make the classroom meaningful and creative as well building a safe place for our community helps establish an effective classroom setting.”


Jayme Wiertzema, Elementary Art, Worthington, Minnesota
“I’m looking forward to having a CLASSROOM this year. The past two years I have taught from a cart and this year my amazing school district allowed me to have a classroom in our school that is busting at the seams! I’m so excited to use my classroom environment to inspire creativity in my students, get to know them and learn from their amazing imaginations in art class!”


Melissa Vecchio, 4th Grade, Queens, New York
“Since so much of a student’s time is spent inside their classroom, the environment should be neat, organized, easy to move around in but most of all positive. I love to use a theme to reinforce great behavior. I always give the students a choice in helping to design bulletin boards and desk arrangements. When they are involved they take pride in the classroom, and enjoy being there.”