This little news nugget caught my attention over the weekend:
Denver Public Schools’ pension plan was pulled into the financial crisis on Wall Street this week when a dearth of buyers at a bond sale cost the fund “hundreds of thousands” of dollars in increased interest payments.
The full article is worth reading in some detail. Particularly the following:
The money paid off the district’s $400 million pension shortfall and helped refinance $300 million in debt at lower interest rates.
Rates on those bonds, however, are variable, meaning they change weekly depending on market conditions*.
This week, because of the unstable economic conditions and buyers’ reluctance to enter the market, the rate for DPS’s bonds jumped and forced the district to pay “several hundreds of thousands of dollars more,” said Tom Boasberg, the district’s chief operations officer. “We think this is a very short-term phenomenon,” Boasberg said
I do not know the details of the DPS bond issue, so my opinion on the details is not overly nuanced. But one does not need much nuance to raise an eyebrow or two when, in the course of a few days DPS now has “several hundreds of thousands of dollars” less than it had a week ago. I also have great respect for Tom Boasberg’s business acumen. But I know enough to know that no one in DPS is able to predict the future of the credit markets. Paulson, Bernanke, and several Nobel winners have been spectacularly wrong, and I don’t think DPS has some crystal ball into the future of interest rates; moreover DPS is running a school system — I don’t particularly want them to spend their time trying to anticipate
the movement of the prime* interest rates.
I would have thought that the DPS bond issuance was fixed; if not, my hope is that DPS negotiated some limited range within which their debt will float, and they have some protection from a widely fluctuating credit market. But I will be dead honest: I don’t believe for one second that DPS playing the credit markets
with floating interest rates* is in my best interest either as a taxpayer or as a parent.
With only a few weeks until DPS asks taxpayers to support the largest school bond in DPS history, it is worth asking for both more transparency on the existing debt and the anticipated debt. And wondering exactly how comfortable we are with DPS making these sorts of decisions.
Postscript (Mon afternoon): Having just watched the $700B bailout fail to pass Congress, while I had been under the assumption that the DPS bond — even despite a very tepid response from the education community and a lot of real problems — would probably pass. I now think it is in some jeopardy. Colorado politicians voting against it included Mark Udall and John Salazar – as well as Musgrave and Lamborn – and their opinions were not shy.
*Posterscript (Mon evening): The initial reporting was incorrect, as I’ve been told that this debt does not float with prime or any index, and that it would take extraordinary circumstances for these shortfalls to wipe out the projected savings overall. However this debt does require a willing market of buyers, which vanished last week. Further explanation and calculation of the potential DPS exposure – exceptional or not – which would insert additional facts into this subjective discussion, and would be most welcome.