Nasty DPS Finance Story Hits Bennet In Campaign’s Closing Days

UPDATE: Former DPS board member Jill Conrad offers a point-by-point response, calling into question key findings, and pointing out “at least 18 factual errors in the article.” Must-read.

There’s not a politically savvy person in this country who will tell you this is a good story for Democratic Senate candidate Michael Bennet. As the New York Times reported last night:

In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution…

To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.

Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.

And of course, in 2008 economic conditions did change, and these complex financial transactions’ less-attractive contingency terms began to kick in. As the Times explains, this is an issue being faced by many local governments who, faced with unsustainable pension obligations and other debt, entered into these arrangements with Wall Street and are now paying more interest and fees than they would be had they issued more traditional bonds (disputed in DPS’ case here).

Today’s New York Times story appears to be the culmination of a detailed narrative, assembled and long shopped by political opponents of Bennet–with the skill of a Pulitzer Prize-winning financial reporter filling in the Wall Street angle. All of which is entirely fair game: Bennet’s term as superintendent of DPS is rightly subject to scrutiny as he runs for election to the Senate, although there’s an argument that Romanoff’s campaign has done so in inappropriate ways. Supporters of Bennet counter, as they have every time this has come up, that Bennet could not have reasonably predicted the massive economic crisis that occurred in 2008–and if the economy hadn’t tanked, these financial instruments would have remained a good deal for DPS. To the extent that DPS was left with less-attractive finances after the global economy ground to a halt, well, there are a lot of people singing that tune today.

But there’s no question that this complex and detailed story leaves Bennet on the defensive. In the absence of an equally detailed response, and certainly when accompanied by a little helpful spin, it paints exactly the picture of Bennet that Andrew Romanoff’s campaign wants. Electorally, however, this story would have been much more advantageous to Romanoff if it had dropped a couple of weeks ago; clearly timed to hit just before the primary, but perhaps not fully taking into account the fact that the election was conducted by mail and many ballots are already in.

More commentary, which unfortunately contained too many factual errors to be promoted, here.

155 Community Comments, Facebook Comments

  1. dwyer says:

    And I am being sarcastic.  This is too serious an issue to be left just to electioneering or paid consultants.  But, who can taxpayers of Denver trust to be objective?

    And if Bennet is in the pocket of the East Coast big money, why is the NYTimes attacking him?  

    I don’t like Bennet.  But, right now, I don’t like anybody.

    • Teeter says:

      Only one contested race here and I cannot vote for either of these guys–they are both just political opportunists, both sullied, both the same.

      I’ll vote in November, clothepin attached to nose, but not this time…….

      • VanDammerVanDammer says:

        all politicians are opportunists.  Sorry but they are no lily white doves in the business.  

        • wade norris says:

          In 2003,Anschutz was sued by the Louisiana Teachers’ Retirement System for a dividend payout while Bennet was in charge of corporate management.

          The reason? They thought gambling on with their investment in Regal was risky and could go belly up – thus taking out a large amount of their Teacher’s Pension.

          But it didn’t  - it was successful and, as mentioned, Bennet made a mint.

          Looks like Bennet thought he could repeat the same feat he learned from Anschutz on Denver Public Schools, only he ignored the markets – specifically the collapse of Bear Stearns.

          This time the gamble did not pay off, and our Teacher’s retirement funds are being depleted by millions – and, also, putting PERA and Colorado Taxpayer’s money at risk.

           

    • MADCO says:

      because she joined the Romanoff staff.

      Has she been arguing against anything Bennet did at DPS because she wants to embarrass his campaign and help Romanoff’s?  

      Or does she have real intellectual and philosophical differences with how DPS was and is run?    I don’t live in her district – but we can’t tell.

      You ask a relevant question –

      who can taxpayers of Denver trust to be objective?

      Who would you trust?

      The way this particular transaction has been spun and framed, you can’t trust anyone who ever worked for a a bank. You can’t trust anyone with a finance background.  You can’t trust anyone who supports either Senate candidate.  etc.

      It would be helpful if everyone could do the math with the relevant facts and decide for themselves.  Not gonna happen.

      • ColoDem Di says:

        And fie on all those frickin’ frackin’ nasty horrible evil awful banky and financy types and anybody who ever so much as uttered the word derivative!  You are a pock on society and should be strung up by your toenails!

        Ha!  Take that!

      • dwyer says:

        Merida is bright and articulate.  But to be a paid consultant for a campaign does raise the question as to where her first loyalities lie.  She was too good potentially for a District and a BOE  which desperately needed brains, guts, and integrity.

        I give her two out of three, IMHO.

        But moving on to Jill Conrad.  She defends her decisions while on the BOE.  No problem with that.  But, what is, if anything, her current relationship with DPS and BOE?

        In our house of many colors, we have kids starting school next week. One just opted out of a DPS school.  It looked like a good school, but I am so glad that the parents are not going to have to deal with and wonder about all this crap.

    • peacemonger says:

      From the NYT:

      “Both Mr. Bennet, whom the White House has praised for his innovative approach to education, and Mr. Boasberg defend the deal they recommended in Denver back in 2008. They say that it has saved the school district $20 million it would have otherwise had to pay to cover the pension shortfall, and they maintain that no one could have predicted the credit crisis of 2008 that elevated the deal’s costs.”

      “Mr. Boasberg said critics of the deal were politically motivated, pointing to the close primary runoff pitting Mr. Bennet, the former superintendent, against Andrew Romanoff, another Democrat, for a place on the ballot for the Senate in the November elections. But Ms. Kaplan said she started questioning the deal before Mr. Bennet was appointed to the Senate in early 2009.”

      “Denver isn’t the only city confronted with budgetary woes aggravated by esoteric financial deals that Wall Street peddled in the years before the credit crisis. Banks have said the deals were appropriate for the issuers and that no one could have predicted the broad financial collapse that put pressure on the transactions. “

      Guess I am not politically savvy. Smells like more hot air from Joe Trippi to me.  

      • DavidThi808DavidThi808 says:

        If Michael Bennet and Tom Boasberg say they made a wise decision, who are we to doubt their self-certification. (sarcasm-off)

        • wade norris says:

          see here how she re-wrote the history of the support for Bennet and the attacks on Romanoff on CoPols:

          http://www.coloradopols.com/di


             shills like JO, Oz, Stryker, O’Toole and others were so nasty, so vile, so rude, that people like me said, “Hey, if Andrew is such a good guy, why does he let these people pollute the blogs with their hate-speech?”

          CoPols wrote it’s first negative Romanoff piece Oct. 20, 2009


             Vote Romanoff for Senate – He’s a Nice Guy and All (+)

             by: Colorado Pols

             Fri Oct 16, 2009 at 09:37:52 AM MDT

          http://www.coloradopols.com/di

          Many of the people you list were not even members of the site at that time

             

          StrykerK2

             Created: Thu Mar 11, 2010 at 15:49:47 PM MST

          And, Andrew did not start any type of advertising until the summer of 2010 – and the negative ads were in the late summer.

          So your claim that


             ”others were so nasty, so vile, so rude, that people like me said, “Hey, if Andrew is such a good guy, why does he let these people pollute the blogs with their hate-speech?”

          People like you or you?

          In fact on Oct.20,2009 in that first anti-Romanoff diary, you posted this

             

          This year, CO has a progressive Senator in Michael Bennet, who also happens to be respected for his financial smarts.  CO has no need to support a challenger.  That is a whole lot different than 2008.

             Tancredo/Marceaux 2010

             ”No fringe on flags.”

             by: peacemonger @ Tue Oct 20, 2009 at 00:37:18 AM MDT

    • andreamerida says:

      I’m happy to discuss the whole thing with you.  district2@andreamerida.com

      You deserve it.

  2. DavidThi808DavidThi808 says:

    Placing bets at the Wall St casino, in the hope of being dealt a good hand, is not something any governmental body should do. We rightly hold Cary Kennedy up as an example of being responsible with our money.

    This strikes me, and I’m not an expert, as DPS thinking they could easily get a big win. Everyone else was making big bucks on Wall St so why not DPS. And Michael Bennet had a lot of credibility due to his background when he proposed this.

    Was it the responsible thing to do back then? As Senator Bennet was the key person making the decision, I’d like to hear him speak to this. And speak specifically to why he thinks it is appropiate to invest public funds this way.

    • MADCO says:

      It was smart.

      While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

      So they did the hard work, got some outside advice, attempted a deal that could have saved significant money for DPS, and  essentially broke even compared to what they would have got in a fixed rate “conservative” structure.

      Where’s the fire?

      Yes – other similarly described  structures  went horribly wrong somewhere else for someone else. Because they were different.

      You have a firewall at your office, right? Yikes, I know about a company who had a firewall that got hacked and they were screwed royally.  Best not to have firewalls.

      Makes sense to you, right?  No, best to have a decent firewall, well run and administered.

      • DavidThi808DavidThi808 says:

        I don’t think it’s appropriate to put public funds into something so risky. Aren’t we all saying the reason to re-elect Cary Kennedy is because she doesn’t do stuff like this?

        As to a firewall, yes we have a standard firewall. We have not replaced it with any super-dooper system that “eliminates” the need for a firewall.

        • MADCO says:

          once got hacked and was so totally screwed.

          See- that proves firewalls are bad.

          This variable rate debt structure went to almost the worst case scenario. And still essentially broke even. Where’s the risk?

          In the true worst case scenario- fixed rate debt would be screwed too.

          But is there a “worst- case” worse than what happened, but not quite so bad that the fixed rate would be ok.  Maybe – and if we ever see the notes from the DPS meetings with their advisors or minutes from the DPS Board meetings, it was probably discussed.

          Cary Kennedy is great.  But her gig and the CFO for a large school district is a different animal.

          • pistol says:

            She presided over a 25% decline in PERA assets.  

            Her fault,no, but it occured during her watch with the approved PERA financial advisors. Truth be told, the decline was not as severe compared to other states retirement programs, BUT

            Our state appointed/elected officials charged with investing public funds are neither knowledgeable of nor capable of due diligence regarding complex financial products/derivatives sold by Wall Street.

      • kingbaby says:

        your technical comparisons.

        If you know anything about firewalls, a big weakness is generally found with people who configure them.

        Perhaps Bennet’s willingness to engage in such a shady deal is analogous to implementing a stateful inspection firewall that NATs TCP 137,138,139 and 445 to an unpatched Windows server and allows all traffic from Untrust to Trust.  Was this person a complete idiot?  Or was he malicious?

        Yikes, I know about a company who had a firewall that got hacked and they were screwed royally.  Best not to have firewalls.

        Maybe it should read:

        I know about a company who had a firewall that was configured by someone who didn’t know what they were doing, got hacked, and they were screwed royally.  Best to have someone who know they are doing configure firewalls.

        OR:

        I know about a company who had a firewall that was configured by someone who maliciously configured it, profited from it, and the company was screwed royally.  Best to have someone trustworthy configure firewalls.

        • MADCO says:

          Except that I watched a company get shut down because theirs got hacked.  As you point out- doesn’t mean no one should use a firewall.

          I did deduce that the talent of the admin was the problem

          But this deal – seems to have been well structured. Bad as it went –  it cost about the same as it would have otherwise.

          While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

          • kingbaby says:

            Was Bennet incompetent?  Did he take an unnecessary risk with taxpayer money?  Was this “financial wizard” duped?

            Or was he malicious?  Did he grease the backs of banks for favors to be named later?

            Or was it a bit of both?

            I really don’t know, and it really doesn’t matter to me.  I simply don’t trust him based upon his record as a whole.  I suppose we’ll see soon what the voters think.

            • MADCO says:

              But when did you stop beating your wife and kids?

              Why hasn’t Glenn Beck ever released the files about that young girl that was raped and killed?

              Bennet was smart.

              He accomplished a complicated refinance that could have saved DPS big money that instead cost DPS  about the same as a simpler fixed rate structure would have cost.

              If he had done something similar in the private sector he would have bonused in the low sevens.  So he was also a little altruistic bringing his skills to the DPS for a fraction of what the market pays.

    • ajb says:

      You’re saying that this was an irresponsible decision – it was akin to gambling with state money.

      BUT, the worst case scenario DID occur. Financial markets imploded. The fallout was that DPS ended up paying only as much as they would have if they had taken the conservative approach you’re advocating.

      So, the logical conclusion is that Michael Bennet (or whoever) managed to structure the deal in such a way that there was almost no down-side and a large potential upside (that wasn’t realized, of course).

      And for this, you’re calling him reckless and irresponsible? That’s just not fair.

      • MikeD1970 says:

        the final rate ended up akin to where it would have been, but DPS paid out far more than anticipated (which is the comparison to fixed)

        Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.

        To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

         

  3. DavidThi808DavidThi808 says:

    Senator Michael F. Bennet of Colorado, above, who as superintendent of schools in 2008 recommended the financing, said no one could have predicted the financial crisis that caused it to go sour.

    It’s interesting that he didn’t consider that markets can decline as well as grow.

    • tellurider says:

      The problem it appears wasn’t the decline in the markets, but rather the complete freeze of the market. That was absolutely unprecedented.  

      • wade norris says:

        “The Denver school board unanimously approved the JPMorgan deal and it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed.”

        If Bennet was the smart Business guru he was supposed to be, the failure of Bear Sterns should have been a warning signal – and even before that, the housing market was already collapsing.

        How many people here know someone personally whose mortgage went bad or went bankrupt in 2007 or 2008?

        Bennet proved he was willing to gamble in a risky market – which could have paid off like it did in 2003 with the Louisiana Teachers’ Retirement funds, but it didn’t.

        I’d rather see that kind of leadership in Las Vegas, not in charge of public policy in Washington DC.

    • LakewoodTodd says:

      I’m not so sure he didn’t consider that markets can decline but a whole lot of smart people didn’t predict the complete crash that we experienced.  

    • Underdelegate says:

      Markets go up, markets go down, markets go up again.  Certainly a Wall Street Insider would have been a better choice for DPS Superintendent.

    • ColoDem Di says:

      All portfolio managers invest and hedge for market movement, even large swings, but almost none do so for a 3rd standard deviation type of event.

  4. JO says:

    The Times story in fact does address this point, albeit indirectly:

    …”the savings cited by the two men [Bennet and his then-assistant/successor Thomas Boasberg] do not take into account termination fees associated with the complex deal..”

    And:

    Agreeing to be locked into a 30-year contract, as public entities have done, is especially costly because getting out of it requires paying penalties to the banks for every remaining year of the transaction.

    Andrew Kalotay, founder of Andrew Kalotay Associates, a debt management advisory firm, said a deal like Denver’s would be highly unusual among private sector issuers like corporations because they recognized the pitfalls of locking themselves into an arrangement for 30 years.

    Moreover, the deal pushed by Romanoff/Boasberg (another superintendent who came from the financial side, rather than the education side) came weeks after the fall of Bear Sterns:

    “…it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed. In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.”

    At the very least, wasn’t the failure of Bear Sterns a pretty clear warning that all was not well in the financial markets? Shouldn’t it have served as a warning against long-term deals involving substantial penalties for renegotiation? That’s the aspect of the deal that is so damaging.

    Titles like “savvy investor,” “leader,” and “innovative” imply success and are conferred after outcomes are known. (Doubt this? Consider this idea: “He was a successful innovator and leader of his company before it failed a couple of months after founding.” Hmmmm, where are our fact-checkers this morning?]

    Will PACman now adjust his campaign and begin running as “the rube who got taken in by them no-good Wall Street shyster sophisticates; he didn’t know nuttin’ but he meant well”?

    PS: As for “commentary that contained too many factual errors to be promoted,” many thanks for a laugh. Glad to see BennetPols fact checkers are busy, busy, busy. Good to know that we can rely on the facts of all diaries promoted to front page status! Politics it is; journalism it ain’t.

     

  5. MADCO says:

    The Denver certificates contained debt issues that had variable rates and were to be resold to investors in weekly auctions; the arrangement carried an annual interest rate of around 5 percent, not counting fees and costs associated with that type of debt. Fixed-rate debt would have cost 7.2 percent.

    Wow. Even if the fees were over 2%  annualized- sounds like a push.

    In the end, a deal that JPMorgan said would have an interest rate of around 5 percent spiked to 8.59 percent during its first fiscal year, and has since settled down to an average rate of 7.12 percent today.

    Averaging 7.12.

    Hmmp – sounds just about the same as the fixed rate would have been.

    Oh- it is just about the same

    While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

    So it sounds like the DPS projected it could save big money. Instead it saved far less than was projected- saving just a bit  instead of the big savings that was forecast.

    Wow- I bet Bennet is proud of this.

    From the campaign trail in mid-July, Mr. Bennet reiterated his support of the deal, saying that it had achieved the school system’s goal of improving its cash flow and merging with Colorado’s Public Employees’ Retirement Association, which meant the schools no longer had to pay 8.5 percent interest on its annual pension shortfall.

    “Despite going through the worst recession since the Great Depression, we did that,” he said in a statement.

    I would be proud too.  Vote Bennet.

    Btw- the NYT headline is misleading. DPS was going to be deeper in debt no matter whether they did it with this structure, a fixed rate or some other debt structure.  

    • MikeD1970 says:

      I thought you had a really valid point, so I read through the story again.

      You are right that eventually the amount of money DPS is losing did adjust to a similar amount to what they would lose if they went with more traditional investments.

      You are wrong in that the end effect is the same.  The story clearly explains that in the time between the deal and now DPS lost a huge amount compared to what they would have if they did not do this.

      Yes it seems to be rebounding now, but DPS was hemorrhaging for years under this deal.

      • MADCO says:

        Your use of the word “lose” and “losing” is weird.

        DPS has debt expense. They would have debt expense whether they did a simpler fixed rate refinance or the variable rate swap refinance they did.

        Morgensen writes that the overall expense to DPS is approximately the same as it would have been had DPS done a simpler fixed rate transaction.

        Structure.

        The Denver certificates contained debt issues that had variable rates and were to be resold to investors in weekly auctions; the arrangement carried an annual interest rate of around 5 percent, not counting fees and costs associated with that type of debt. Fixed-rate debt would have cost 7.2 percent.

        Forecast and average result to date.

        In the end, a deal that JPMorgan said would have an interest rate of around 5 percent spiked to 8.59 percent during its first fiscal year, and has since settled down to an average rate of 7.12 percent today.

        Could get better- but so far approximately the same as it would have been.

        While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

        Yes it went worse, and then got better. The forecast did not match actual events.  Even so, at present the expense to DPS has been approximately the same as it would have been.

  6. tellurider says:

    Despite all the “fees” and whatever, they never address the key question…did this transaction save the district money or not?

    This article doesn’t do enough analysis on this point and really get to it. Luckily, local reporters seem to have been covering this for awhile. This David Milstead article seems to answer the question…

    http://www.ednewscolorado.org/

    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.

    • catpuzzle says:

      I find this article to be very confusing. It seems like a lot of innuendo rather than…say…the facts? This breakdown of what the transaction actually was is the sort of clear and un-hyperbolic explanation that is completely missing in the Times piece.

      At issue is the district’s effort in 2008 to handle its $400 million pension shortfall and refinance at a better interest rate.

      Then-superintendent Michael Bennet and his finance chief Tom Boasberg proposed to lower the rate from 8.5 percent to slightly under 6 percent in the form of a fixed-pay interest rate swap. The deal was estimated to raise $20 million a year for schools. No savings were realized last year because of the market crash, but this year the district expects to save $10 million to $15 million.

      http://www.denverpost.com/ci_1

    • MikeD1970 says:

      I saw the diary you all wrote last night in which you wanted people to think it was confusing, but really this is quite clear.

      As for GreatEd Colorado, they aren’t exactly journalists — they are an interest group with an angle on this.

      The short of it is that Bennet gambled tax payer dollars and lost.  The banks have made millions off of it, and those same banks are funding Bennet’s campaign.

      As David says above:

      I don’t think it’s appropriate to put public funds into something so risky. Aren’t we all saying the reason to re-elect Cary Kennedy is because she doesn’t do stuff like this?

      Maybe that’s partially why Kennedy is supporting Romanoff.

      • MADCO says:

        DPS did not gamble and “lose” by any useful definition of lose.

        While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

        The forecast showed big savings.

        The market blew up- even forze for a bit – and those savings were not accomplised.

        Instead- DPS saved very little and their expense “roughly in line with what the school system would have paid in a fixed-rate transaction. “

        • MikeD1970 says:

          that point doesn’t seem in dispute.  Wasn’t there a better way to have done this?

          • MADCO says:

            DPS  had expense from  debt.

            DPS refinanced existing debt and added to it for sound reason (PERA merge).

            In the refi DPS could have done a simpler fixed rate structure.  Instead DPS did a variable rate with swap structure.

            The overall expense, according to the NYT, has been “roughly in line” as it would have been if they had done the fixed rate.

      • Underdelegate says:

        “The short of it is that Bennet gambled tax payer dollars and lost.  The banks have made millions off of it, and those same banks are funding Bennet’s campaign.”

        -Mike, you’ve made a direct assertion here, but it sounds more like a misleading generalization…

        Can you substantiate this, or should it be relegated to the snipe category?  

    • MADCO says:

      While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

    • bud says:

      in ednewscolorado.org

      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.

  7. DavidThi808DavidThi808 says:

    Why this?

    To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

  8. DavidThi808DavidThi808 says:

    Also from the article:

    A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system’s independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada.

    Why on earth was their main advisor someone who would profit from the deal? That’s like hiring BP to decide if we should drill off-shore.

  9. Froward69 says:

    (thats liked in the past tense)

    Test scores were improving.

    Grad rates were too.

    BUT

    if the district has to sell buildings/lay off teachers/pay millions for Bennets rigged investments…  Bennet has done more damage to DPS/education than republicans have ever been able to.

    Bennet must be relieved of all public responsibility.

    • ajb says:

      Faced with the pension gap, what should he have done? How much would that have saved?

      And exactly what do you mean by “Bennet-rigged investments”?

      And what damage did Bennet do to DPS/education?

  10. MikeD1970 says:

    Republicans pushing TABOR said everything would be fine as long as the economy always improved.  Bennet/Boasberg seemed to think the same thing — this would work as long as nothing ever went wrong with the economy.

    Unfortunately, Doug Bruce and Michael Benent both failed to realize the detrimental effects of this kind of risky behavior.  

    DavidThi is spot on when he compares Bennet’s actions to what the Republicans want to do with state money on a larger level.

    • MADCO says:

      While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

      • MikeD1970 says:

        I always thought that public money was invested very conservatively for a reason — at least that’s what democrats believe.

      • MikeD1970 says:

        I addressed this above as well.  The point of that statement is that eventually the rate at which DPS is losing money is now in line with what it would have been under other options, but between the time the deal was cut and now DPS lost a lot more money than they otherwise would have.  Summation?  Really bad idea to do this and DPS suffered.

        • MADCO says:

          Morgensen writes that the overall expense to DPS is approximately the same as it would have been had DPS done a simpler fixed rate transaction.

          Structure.

          The Denver certificates contained debt issues that had variable rates and were to be resold to investors in weekly auctions; the arrangement carried an annual interest rate of around 5 percent, not counting fees and costs associated with that type of debt. Fixed-rate debt would have cost 7.2 percent.

          Forecast and average result to date.

          In the end, a deal that JPMorgan said would have an interest rate of around 5 percent spiked to 8.59 percent during its first fiscal year, and has since settled down to an average rate of 7.12 percent today.

          Could get better- but so far approximately the same as it would have been.

          While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.

  11. Awen says:

    The whole business of shoring up the DPSRS pension plan was done largely to make it financial feasible for a merger with PERA – the merger would not have taken place without it – it had been put on hold several times because of the DPSRS financial situation.

    • bud says:

      The DPS fund (pre PERA merger) was managed by outside investment managers who charged high fees.  PERA has in-house investment management that is much lower cost.  The whole story of the merger with PERA needs to be looked at, not just a piece.

  12. bud says:

    Any story coming out days away from the election smells.  It’s not like this happened this week.  The Romanoff campaign is counting on, once again, that only a few understand these complex financial transactions.  I’ve lost money since 2008 in what I thought were non-risky investments.  All the pension funds have lost money since 2008.  I’m sure everyone on here has already voted anyway.

  13. Half Glass FullHalf Glass Full says:

    C’mon – get serious.

    This story has legs only if Romanoff has any factual basis whatsoever to be able to claim that he would have done things differently. He doesn’t.  

    • MikeD1970 says:

      As this site says, this is a very fair issue.  Michael Bennet talks about how he “helped” DPS — this is an in-depth article that actually looks into that.

      • AristotleAristotle says:

        and his stewardship of DPS is certainly germane to the Senate race. If he screwed up on this (and it sure looks like he did), his competition is beside the point. Besides, neither Romanoff, Buck, nor Norton ever attempted to run a major school district, so I don’t see why “what they might have done” in Bennet’s place matters.

    • DavidThi808DavidThi808 says:

      This deal reeks of “I’m a brilliant Wall St financial whiz and let me show you how we can get money for free.” If DPS had won big on the bet everyone would have congratulated Bennet except for a few like me who still would be saying don’t place bets with public money.

  14. jillkconrad says:

    I’m all for raising important questions (as I and other board members did in 2008) about major financial and other policy decisions. What disappoints me is the ways in which the facts have been intentionally distorted in many of the blogs and articles I have read on the subject in the last several months. Despite the great reputation (and my own respect for the NYT), I am shocked by the lack of attention to detail and contextual information in the Morgenson article. Here is my take…and an account of at least 18 factual errors in the article…

    A. DPS achieved three critical goals with this transaction: we funded the pension in order to allow us to merge with PERA, by merging with PERA we achieved portability, and we added back $20M to schools (previous cuts had been over $80M)

    B. Last Friday (7/30) PERA released the CAFR (independent audit) of current funding levels and projected funding: DPS is funded at 88% as of 12/31/09 and will achieve full funding in 2031, 22 years. PERA/school division is funded at 70% with full funding at 2040. Clearly this has had the right effect, financially for DPS employees and academically for today’s kids and teachers.

    C. The article is full of inaccuracies and misleading uses of data: I count at least 18 factual errors in this poorly researched and highly slanted article:

    1. “Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.” – Actually, the district has realized $20 million in savings to date compared to not having done the transaction.

    2. “While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.” Not true. Fixed rate debt cost 7.25%. DPS is now paying 6.1%

    3. “In the end, a deal that JPMorgan said would have an interest rate of around 5 percent spiked to 8.59 percent during its first fiscal year, and has since settled down to an average rate of 7.12 percent today.”

    4. To the contrary, the all in cost including all fees of the transaction was projected and budgeted at between 5.75% and 6%, not 5%, at the time the deal was approved. DPS is now paying 6.1% inclusive of all fees, not 7.12% . The cost did spike to 8.59%, inclusive of all fees, during the 2008-09 fiscal year.

    5. “And for years, the school system had not met its required annual pension payments to ensure a fully funded plan; by 2007, the school system faced a $400 million gap.” False. With very few and not economically material exceptions the district had made all required annual payments for years. The pension was underfunded because of the 2000 – 2002 market crash.

    6. “The Denver schools essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise.” To the contrary, the rate was fixed via the interest rate hedge or “swap” transaction the article later criticizes. The transaction structure is the opposite of a variable rate mortgage where the homeowner is subject to rises and falls in interest rates.

    7. “Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestion and issued so-called pension certificates with a derivative attached. Together, $750 million was raised using the riskier pension certificates.” This is inaccurate and misleading. Regardless of whether the pension debt was fixed or variable rate, the debt would still have been in the form of pension certificates of participation. There was no option of a “plain vanilla bond”. In 1997, we issued fixed rate pension certificates of participation. In 2005 and 2008, we issued variable rate pension certificates of participation, in both cases with a very commonly used interest rate hedge, the “derivative” the article refers to.

    8. “To avoid mounting expenses, the Denver schools are looking to renegotiate the deal.” False. Expenses are not mounting. Expenses have declined considerably. Our current all-in costs, including interest and fees, is 6.1%.

    9. “And had the school district issued fixed-rate debt, it would not have paid Wall Street the cornucopia of fees embedded in the more complex deal.” Actually, the fees up would have been the same whether the debt was fixed or variable. Ongoing fees were budgeted from the beginning and are all included in calculating the $20 million in savings thus far.

    10. “Unlike many school district officials, both men were financially sophisticated and had worked together in the private sector.” False. Bennet and Boasberg have never worked together in the private sector.

    11. “Like a homeowner, Denver essentially started out with the equivalent of a standard, fixed-rate mortgage that allowed it to refinance if interest rates fell.” False. Denver’s 1997 fixed-rate pcops could not be refinanced. There were no call provisions in the 1997 pcops or ability to refinance if interest rates fell.

    12. “Moreover, refinancing was extremely costly, given the hefty termination fees.” False. There are no termination fees per se. There is a make-whole provision that runs both in favor of and against the banks (and DPS). DPS has the sole option to terminate the swap, which is priced based on publicly quoted Bloomberg rates. If interest rates rise, then the banks owe a termination fee to DPS should DPS choose to terminate. if interest rates fall, then DPS owes a termination fee to the banks. The make-whole fees are exactly the same in either direction.

    13. “Agreeing to be locked into a 30-year contract, as public entities have done, is especially costly because getting out of it requires paying penalties to the banks for every remaining year of the transaction.” False. There are no penalties for remaining years of the transaction. There is a make-whole provision that runs both in favor of and against the banks as described in the previous para.

    14. “Like the punishing prepayment penalties some homeowners have to come up with when paying off a mortgage early, termination fees on deals like Denver’s are essentially charges levied to rewrite the terms of a contract.” False. There are no charges levied to rewrite the terms of the contract, only the make-whole provision described above. If interest rates rise, the banks owe a termination fee to DPS.

    15. “The pension turned in a dismal performance in the credit crisis – as was the case with most such funds – losing almost twice the $400 million borrowed by the school district to plug the pension gap. As a result, the school system’s pension shortfall recently stood at around $386 million, only slightly lower than it was two years ago, and even though $400 million had been funneled into it in 2008.” Article does not mention that absent the $400 million contribution to the pension in 2008, the current pension shortfall would be twice as large as it currently is.

    16. “While the pension’s merger with the state system allows Denver’s school system to avoid paying interest on shortfalls, that benefit is temporary. If a shortfall still exists in 2015, the merger requires that it be closed.” False. DPS must continue to pay interest on the shortfall, which is known as a UAAL payment. Article fails to note that Cavanaugh and Macdonald, the independent auditor to PERA, the state pension fund, have projected the DPS pension fund will be 140% funded at the end of the current 30-year project period. The auditor also found that the district’s pension fund was significantly better funded than the statewide division and all of the other school districts, and would be fully funded years before the rest of the school division would be.

    17. “Boasberg maintains that the deal has allowed Denver to hire teachers while other school districts are cutting back. But Henry Roman, president of the Denver Classroom Teachers Association, said that fewer teachers had been hired this year than in previous years.” This is remarkably misleading. All school districts in Colorado are facing severe budget cuts. While it is true we are hiring fewer teachers than in previous years, the savings from the pension debt transaction has allowed us to actually hire teachers while most of our neighboring districts are laying teachers off and instituting furlough days.

    18. And finally, the article quotes Jeannie Kaplan. It does not attribute the fact that she is a leading fundraiser for Andrew Romanoff, Michael Bennet’s opponent in the primary, and falsely claims that she raised issues about the pension debt in advance of the primary race. Article offers no substantiation that Ms. Kaplan raised this issue in advance of the primary race since no such substantiation exists. The article does not mention that a second board member, Andrea Merida, who has questioned the transaction is a paid staffer for Mr. Romanoff’s campaign.

    The fact remains that this transaction has positioned DPS, its employees, and most of all its students to be better off in the long run than they would have been if we had not taken action. I was proud to be a part of the decision then, stand by it now, and am grateful for the leadership and vision of Michael Bennet, Tom Boasberg, and my fellow board colleagues who are focused on one thing-the most important thing-turning DPS around so that all resources, time, and attention serves to drive increases in student achievement, graduation rates, and college success.

    Sincerely,

    Jill Conrad

    DPS Board Member, 2005-2009

    • AristotleAristotle says:

      I know that you can’t post diaries yet, since you’ve just created this account. But this clearly deserves to be a diary. (When posts like this are just comments, they get a lot less attention, especially when they’re long.)

      So if you’ll give me your permission, I will copy this and post it into a new diary. I’m positive it will get more attention that way.

      Awaiting your reply.

    • StrykerK2 says:

      because they sent out the exact same talking points in response to this.

    • DavidThi808DavidThi808 says:

      First off, thank you for posting here.

      Ok, here’s the question – do you think we should invest Social Security trust funds in the market? If so, fine (as in your consistent).

      But if you don’t think we should gamble with the nation’s retirement funds, why did you agree to a gamble with the teacher’s retirement funds? And I quote you with the word “gamble.”

      • bud says:

        They employ portfolio managers for their huge holdings.

      • VoyageurVoyageur says:

        PERA has always,to my knowledge, invested heavily in equities.  As far as I know, all public employee retirement funds include stocks in their portfolios, though PERA was criticized for leaning too heavily that way.   My own retirement fund is largely stocks.

         Social Security, by law, can only invest in treasury securities.  ALL investments are a gamble.  I prefer the long term return on the SandP, still above 9 percent per annum since the index’s inception, IIRC to the minuscule returns of T-Bills.  

          But remember, with Social Security, it is a zero sum game.  Investing the surplus funds in T-bills not only provides the safest possible place to put them, it provides the government with a low interest source of borrowing.  What SS may lose as a rate of return is a gain to taxpayers in lower borrowing costs.  

         But to repeat, PERA has always had a sizeable equity position, about 70 percent, I think, in the days when I covered it.  

        No Bennet/Romanoff element to that point, just fact.  

    • DavidThi808DavidThi808 says:

      Hi again;

      One other question. Why did you use Royal Bank of Canada as an advisor when they were going to participate in the deal. Wasn’t that a gigantic conflict of interest?

  15. DavidThi808DavidThi808 says:

    Normally the rule is safe secure investments for public funds. And the ultimate example of this is Social Security where it is all invested in U.S. government debt.

    The Republican proposal for Social Security is instead each of us invests it in the stock market. We Democrats have pointed out what a bad idea that is for so many reasons.

    Yet that is exactly what Michael Bennet and DPS did, they took the public money and made a risky bet in the market. It could pay off great, it could pay off terrible, and it is risky.

    My question is, should we take a greater risk with teacher’s retirement funds than we do with the nation’s retirement funds? Or should we expect the same safe conservative approach for both sets of retirement funds?

    I think they deserve the same care – by definition. If you support taking Social Security private then I can understand and expect you to support what Michael Bennet did.

    But if you think Social Security should continue to operate as it presently does, how on earth do you support a radically different approach for the DPS retirement funds?

    • ajb says:

      Did you not read it?

      This comment is really no better than a Wade Norris hit piece.

      • wade norris says:

        Wade Norris! I say!

        that’s the only defense you’ve got ajb?

        bwaahaahh!!!!

        • ajb says:

          I haven’t voted yet. But I will tonight.

          I actually like both candidates. Bennet has done a credible job. Romanoff did a good job as speaker. When Ritter solicited names, I “voted” Romanoff and was disappointed when he wasn’t selected. I think he would have been a stronger candidate in the general.

          So who to vote for?

          Policy-wise, they’re clones. They’re both DLC-type dems. I’m OK with that. as they say, politics is the art of the possible.

          But because of this, Romanoff has to distinguish himself, somehow.

          He says he would have voted against this or that instead of for it, as Bennet did. I don’t believe it. Talk is cheap and I’d rather have flawed HCR or financial reform, than no reform at all.

          Romanoff says he won’t take PAC money. That’s nice, but it means in the general that he’ll show up to a gunfight carrying a knife. (I think that this is, in large part, why the Guvs appear to support Bennet).

          Bennet, on the other hand, appears to have run an ineffective campaign. If he can’t beat Romanoff, how can he beat Buck?

          So who to vote for?

          I keep looking for compelling reason to vote for one or the other. I spend far too much time watching this blog. The attacks are par for the course, typically making mountains out of molehills. I generally haven’t been commenting on the AR/MB foodfight, except when I see something disingenuous.

          Your comments, Wade, are all-too-frequently ad hominem attacks or highly-spun hit pieces devoid of a factual basis. The level of vitriol makes them hard to take seriously.

          In this thread, MADCO and Jill Conrad offer what appears to be a compelling defense or even refutation of the charge that Bennet was reckless with DPS pension funds. So far, I haven’t seen any rational rebuttal. All I see is Michael Bennet! Bear Stearns!! Risky Gamble!!! Las Vegas!!!! Pretty weak stuff.

          I’m done posting until after the primary. Enjoy the foodfight.

    • DavidThi808DavidThi808 says:

      The question remains – should we be gambling with public retirement funds? If not, then how a specific bet turned out doesn’t excuse the attempt.

      And it opens up a very interesting question – would Senator Bennet vote to do the same with Social Security trust funds?

  16. jillkconrad says:

    I would be fine with posting this as a diary. I never have, so I don’t know how. Thanks.

    Jill

  17. bud says:

    NYT never interviewed any of the school board current or former members who were not Romanoff (paid or major fundraiser)  supporters.

  18. StrykerK2 says:

    ok here is some language for the dispute about the ultimate effect.  Yes — what Bennet did was worse than if they had gone with a fixed rate:

    The fund turned in a dismal performance in the credit crisis – as was the case with most such funds – losing almost twice the $400 million borrowed by the school district to plug the pension gap. As a result, the school system’s pension shortfall recently stood at around $386 million, only slightly lower than it was two years ago, and even though $400 million had been funneled into it in 2008.

    • MADCO says:

      It’s the PERA investment fund  - or what ever it’s called.

      And yes, the market went down.

      I know, I know the DOW, NASDAQ and S&P falling was all Bennet’s fault.

      In fact, I talked to my cousin who lives in Greece – she’s pretty sure Bennet blew up the Greco economy too. And got the Olympics to go to London. And  was somehow responsible for Heath Ledger taking the wrong combination of meds.

      But I would point out that none of this was anything until Romanoff challenged.

      • ColoDem Di says:

        Why stop with financial matters?  Surely the plague, locusts, and droughts are all Michael Bennet’s fault.  Someday when the apocolypse comes, let’s blame that on him too.

  19. bud says:

    When the NYT doesn’t even attempt to get current quotes from anyone involved who is not paid by or major fundraiser for the Romanoff campaign.

  20. Mike Collins says:

    DEFENDER OF THE DEAL Senator Michael F. Bennet of Colorado, above, who as superintendent of schools in 2008 recommended the financing, said no one could have predicted the financial crisis that caused it to go sour.

    NY Times

    Oh, yeah?

    “Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

    Bowing to aggressive lobbying – along with assurances from banks that the troubled mortgages were OK – regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

    NY Daily News

    “Congressional Leaders Stunned by Warnings”

    NY Times

    “Spitzer Whacked For Warning Of Financial Crisis, Bush Fed Targets Taxpayers As Bagholders”

    E Pluribus Media

    PBS Frontline Financial/Economic Crisis

    In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

    “I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. “I was told that she was irascible, difficult, stubborn, unreasonable.” Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was “clearly a mistake.”

    Born’s battle behind closed doors was epic, Kirk finds. The members of the President’s Working Group vehemently opposed regulation — especially when proposed by a Washington outsider like Born.

    “I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’”

    Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. “Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,” Kirk says. “Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.”

    Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.

    “It’ll happen again if we don’t take the appropriate steps,” Born warns. “There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.”

    Frontline

  21. StrykerK2 says:

    I have been highly critical of you I know and I will give credit where it is due.  Your willingness to fairly engage this story on the frontpage is something to be noted.

    Thank you.

  22. StrykerK2 says:

    Markos of dailykos.com put this quite…umm…eloquently:

    CO-Sen: Michael Bennett fucked shit up.

       
    In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution.

       The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs – money that could be plowed back into Denver’s classrooms, starved in recent years for funds.

       To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.

    You can guess what happened next. This “exotic deal”, akin to a variable interest rate mortgage, has now cost the Denver school system $25 million more than originally planned, and getting out of the deal would cost the district another $81 million in termination fees.

    But no one could’ve predicted! (That’s really Bennet’s defense.)

  23. BlueCat says:

    This story may be too late to have much of an effect.  People who buy Romanoff’s ads will buy this too but they were already going for Romanoff.  People appalled by blatant lies in Romaoff’s ads and supporting Bennet will not let this article change their minds.  The very latest procrastinators are mainly low info voters for whom this won’t be a blip on the screen. All of us here,  typical of the high info type who either already voted or know who they want at this point, seem to be holding steady in our entrenched positions.

    Will the 10th ever get here?  This race passed sickening on its way to repulsive last week.

  24. JO says:

    Day 1: Details, details. Was it $25m worse off than expected, or just the same as it would have been anyway? If you don’t pay $81 million in termination fees, what difference do they make? Would you have gotten out of the deal if but for that? Did she call Bennet and not get an answer, or get a hurried answer “from the campaign trail.” Is that a semicolon in the 17th paragraph? Should have been a period! Obviously the reporter is a shill! etc.

    Day 7: That story about how something Bennet did as superintendent didn’t turn out well.

    Day 14: Yeah, I sorta remember that story, Bennet did something wrong, made a bad deal for the school system, don’t remember the details…

    Day 42: Bennet’s new ad resume makes no mention of his time as superintendent.

    PS: Does anyone remember Pete Coors’s ads in.. ah, when was it that he ran? What was he running for? Is he the one who sold Coors to Amstel?  

  25. Advocate says:

    if the truth on an issue, or at least verifiable facts since truth can be in the eye of the supporter…comes from someone who supports Bennet, but has knowledge of the events allegedly causing such a stink…does it matter all that much?

    I guess Romanoff folks will be typing fast and furious over the weekend, probably accusing Bennet of causing the recession in Colorado in no time at all. I would like to know what possessed the Times to publish an article that obviously suffers from fact checking tremendously..

  26. Advocate says:

    that so many critics of this issue are finding fault because Senator Bennet and others didn’t look into their crystal balls and see what the banks and the finance companies were doing to screw up their books to make money on the derivatives and the other exotic money transactions in 2008. Actions that were invisible to the SEC, either because they didn’t want to look, or lacked the authority due to rollbacks of oversight regulations by Regan, Bush and finally Clinton.

    I mean. WHO saw this coming? The only folks were the ones who actually constructed the mess, and one or two former Wall Street folks who went short and made billions predicting the downfall. That’s it. Warren Buffet lost money, for pete’s sake. Are you  smarter than he is when it comes to large investments?

    Hindsight always easy, especially when the current economy is making everyone cranky and scared.

    I would urge folks to read the point by point rebuttal of the Time’s factual errors and then take the time to judge.  

    • BlueCat says:

      it will all be over but the shouting. Today is the last mail in day. I really don’t think most waiting until the last minute to drop off are paying a whole lot of attention to details.  Many just assume all the negative stuff is the usual political lying anyway. TV ads not much help anymore as people have seen them a jillian times and they are now just wallpaper Few read any paper.

      Die is cast and we just have to put up with it until Tues or Wed.

       

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